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Full text of "The Federal Reserve Act, a discussion of the principles and operations of the new Banking Act as originally published in the Wall Street Journal and the Boston News Bureau, including a description of the financial , commercial and industrial characteristics of each of the Federal Reserve Districts and the Federal Reserve Act fully indexed , with pertinent legislation"

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Federal Reserve 
Act 



Digitized by the Internet Archive 

in 2007 with funding from 

Microsoft Corporation 



http://www.archive.org/details/federalreserveacOObarruoft 






£ 



The 

FEDERAL RESERVE 
ACT 



A Discussion of the Principles and Operations 
of the new Banking Act as originally pub- 
lished in The Wall Street Journal 
and the Boston News Bureau 



By 
C. W. BARRON 



Including a Description of the Financial, Commercial 

and Industrial Characteristics of each of the Federal 

Reserve Districts and the Federal Reserve Act f idly 

indexed, uith pertinent legislation 




1914 

BOSTON NEWS BUREAU COMPANY 
BOSTON 



COPYRIGHT, 1914, by 
BOSTON NEWS BUREAU COMPANY 



INTRODUCTORY. 



It is with some misgivings that I have consented to have placed 
in book form these twenty-eight articles discussing the Federal 
Reserve Act. 

Having studied this measure in the embryo of legislation, 
the principles operative in its formation and the strength and weak- 
ness in the minds of its makers, I deemed it my duty to speak the 
hopeful word in the financial publications with which I am associated, 
The Wall Street Journal, the Boston News Bureau and the Phila- 
delphia News Bureau. 

I had to work quickly, in such hours of the day as I could com- 
mand apart from my regular labors, to issue these articles every 
alternate day, beginning Jan. 9, 1914. 

I have been surprised at the favor of their reception. Requests 
for their publication in book form have come from various parts of 
the country and from abroad. I was surprised also to learn that 
they were translated as fast as issued for the use of bankers in 
Europe. I made my statements boldly, avoiding technical terms, 
and expected the response at least of criticism and controversy. 
Now I yield to the demand of many readers to put these notes in 
more enduring form than the columns of financial newspapers. 

It is a pleasure and a duty to acknowledge assistance. First I 
would thank John Perrin, probably one of the most widely known 
bankers in the United States and recently appointed Federal Reserve 
Agent for San Francisco. Together we watched the varying phases 
of debate at the Capitol, discussed banking principles to the "wee 
small hours," and rejuvenated ourselves by laughing over many 
phases of the debates as the bill was being put into shape for final 
enactment. Perrin knows a bank from the messenger right up 
through the line to the president's desk, and what is more, he knows 
all the principles underlying credit and is familiar with every financial 
theory that ever rooted or bloomed on either side of the Atlantic. 
He won't say this himself. Indeed, he will probably only recognize 
the fact and then doubt it when he first reads this in print. 

To Charles P. Blinn, Jr., of the National Union Bank, Boston, 
I am indebted for statistical compilations which, while not appearing 



4 INTRODUCTORY. 

in this book, greatly assisted me to give the proper poise and balam t- 
when transmuting dry statistics into popular presentations har- 
monious in principles and practice. 

I am indebted to Luther Conant, Jr., formerly United States 
Commissioner of Corporations, but in the year 1913-14 on the staff 
of The Wall Street Journal, for most conscientious reading of manu- 
script and proofs. To his accurate scrutiny of all phrases, figures and 
balances is probably due the fact that the controversies I so con- 
fidently expected have not arisen. 

The articles in the latter part of this book by Dr. John F. Crowell 
of The Wall Street Journal, and formerly of Washington, speak for 
themselves. Dr. Crowell's life study has been in the line of statistical 
presentation, as well as in the principles which underlie facts, and 
out of which all facts arise. 

These twenty-eight essays on the Federal Reserve Act are really 
Essays on Credit. To the oncoming generation of bankers who are 
to make this country great and prosperous, if not foremost in the 
world of finance, I would emphasize that banking is essentially 
nothing but credit and that the true gold in the world is the gold of 
credit. It has been a popular impression, handed down from ancient 
times, that banking is putting money in a box or stocking or in the 
hand of another for safekeeping. This is banking by an Indian, 
a Hottentot, or an aborigine, ancient or modern. 

Real banking is giving and receiving real credit. The essential 
gold is the gold of honor, — of promises well based on integrity 
maintained. The money box holds only the needed change for the 
Saturday night payroll, enough gold for the exchanges of commerce 
between states and nations where credits have not yet full or 
effective sway, and also enough gold to insure confidence and 
ability to maintain that confidence by prompt pay. 

Modern banking is very young in the world's history and it 
will take time for the world to realize that real character and real 
credit are the true gold — here and hereafter. 

C. W. Barron. 
Nov. 6, 1914. 



TABLE OF CONTENTS. 



PART I. 



COMMENTS ON THE FEDERAL RESERVE ACT. 

I A New And Broad Creation 

II The Underlying Motive . 

III Most Unpopular Must Be Its True Governors 

IV The Government Underwriting 
V The Second Danger In The Law 

VI The Federal Agent And His Reserves 

VII Independence Of The Reserve Board 

VIII Reduction In Bank Reserves . 

IX Primary Credit Expansion 

X Political Principles .... 

XI Expansion And Contraction 

XII Can State Banks Quit The National System? 

XIII The Old And The New Reserves . 

XIV How Contraction May Be Forced . 
XV Expansion By Member Banks . 

XVI The Need For Expansion .... 

XVII An American System And New Definitions De- 
manded ..... 

XVIII Commercial Paper 

XIX Construction Needs 

XX Our Investment Digestion 

XXI Currency, Tariffs And Labor Now Touch 
Elbows ....... 

XXII New Banks Need Not Be Expensive '. v 

XXIII Federal Reserve Notes And Bond Values 

XXIV Reserve Deficiencies 
XXV Three Per Cent. Money . 

XXVI Time Deposits And Call Loans 

XXVII The Seven Possible Inflations 

XXVIII Inflation By Note Expansion . 



Page 
8 

10 
13 
16 
19 
22 

. 26 
29 
32 
37 
40 
42 
44 
48 
51 
55 

62 
65 
68 
70 

72 
' 74 
78 
81 
85 
89 
93 
98 



TABLE OF CONTENTS. 



PART II. 
THE FEDERAL RESERVE DISTRICTS. 



First District, Boston 
Second District, New York 
Third District, Philadelphia . 
Fourth District, Cleveland 
Fifth District, Richmond . 
Sixth District, Atlanta . 
Seventh District, Chicago 
Eighth District, St. Louis 
Ninth District, Minneapolis 
Tenth District, Kansas City . 
Eleventh District, Dallas 
Twelfth District, San Francisco 

Map 

Boundaries Of The Districts . 

Statistical Table 

Personnel Federal Reserve Banks 



Page 
102 
105 
109 
112 
li:. 
118 
121 

P->7 
13] 

135 
139 
[42 

143 
146 

147 



PART III. 

STATUTES. 

The Federal Reserve Act ...... 151 

Index To Federal Reserve Act ..... 186 

Ai.drich-Vreeland Act ....... 199 

Currency Act, March 14, 1900 .... i'0't 

Rkvised Statutes Referred To In Federal Reserve Act 216 



PART I. 

COMMENTS ON THE FEDERAL RESERVE ACT. 



A NEW AND BROAD CREATION. 

Next to the Declaration of Independence and the Constitu- 
tion of the United States the Federal Reserve Act, signed by President 
Wilson Dec. 23d, 1913, may be the most important measure ever 
placed before the people of these United States. Upon its wise ad- 
ministration depends the good or ill of a hundred million people and 
as a nation we shall probably live under it not only for the 20 years 
named in the act, but, with amendments found necessary from time 
to time, for possibly many generations. 

The miraculous thing about its creation is that it sprang forth 
in a few hours before the Christmas holidays from a new Congress 
that understood little of currency and less of banking and an Execu- 
tive and a Cabinet that never made any pretence to a clear under- 
standing of financial principles. Yet a Congress of financial ex- 
perts, with an Administration and a Cabinet composed of the leading 
bankers of the country, probably could not have produced so good a 
bill. Bankers are not generally progressive or even open-minded. 
The line of safety must be their rule of procedure, and all changes they 
naturally regard with suspicion. 

Congress, having no fixed principles, was subject to no prej- 
udices and the bankers, who could never be induced to formulate 
a bill, unconsciously made one by their negations. 

This bill is the re-formation of an absolutely unworkable and 
chaotic measure passed by the House. It was forced into shape 
by pressure from the Administration to do something promptly, 
as the nether millstone, and the determination of the banking 
interests to quit the national banking system, as the upper mill- 
stone, should the act give evidence of being for them dangerous. 

Yet the bill in its broad principles is the result of currency 
expert and banking agitation that has been going on for well nigh 
a generation; even before the necessity for currency legislation 
was emphasized by the 1907 panic. 



8 THE FEDERAL RESERVE ACT. 

The bill as it passed the House was so highly dangerous as 
to be undiscussable. Had not the financial papers refrained from 
criticism, a panic might easily have ensued. Had the House bill 
passed the Senate and been signed by the President, it might have 
disrupted the national banking system and caused the sudden re- 
tirement of $700,000,000 of national bank currency. 

The country has never been informed of the quiet currents 
of expression that went on last autumn between leading banking 
interests. The sentiment of the national bankers crystallized in a 
quiet but unrecorded determination to make no acceptance of the 
House bill and to avoid the creation of any panic by simply sitting 
still and leaving it to the Administration, if it so elected, to enforce 
the act and put the national banks out of existence through receiver- 
ship. In other words, the banks would not themselves take the 
responsibility of a foreclosure upon the national banking system, with 
a contraction of $700,000,000 in the currency afloat, which meant the 
sudden retirement of 40% of the money in the hands of the people. 

This was the quiet sentiment of the national bank interests 
of the country as understood and privately, yet individually, formu- 
lated at the American Bankers' Association Convention in Boston 
in October. 

Our readers will, therefore, now better understand why the 
financial newspapers have so little discussed the currency measure 
while it was pending. 

The bankers were a unit in their declaration against political 
control of the credits of the country. They saw the dangers of 
absolutely free check collections, giving rise to check-kiting from 
one end of the country to the other; the impossibility of calling' up 
the reserves from the banking interests of the country, as proposed 
in the House bill, without disaster, and sundry other features of this 
bill that made it beyond the probability of any volume of money in 
the country to inaugurate, to say nothing of the amount of credit 
required to sustain it, — the disaster of contraction to inaugurate it 
and if inaugurated the wild check-kiting and inflation that must 
follow. 

Now, miracle of miracles, with responsibility to nobody, and 
yet with credit to everybody, the millstones of banking sentiment 
and political legislation have ground out a bill that may prove, with 
wise administration, as much of a marvel as the Declaration of In- 
dependence or the Constitution of the United States. 

While the bill was under discussion in the Senate it was changed 
so rapidly that the financial world, except for a few leading experts, 
lost personal interest in it, and refused to follow the matter in the 



THE FEDERAL RESERVE ACT. 9 

news of the day. But now that financiers have had time to read the 
full text of the conference bill, as signed by the President, it is 
not saying too much to declare that they are astonished at its breadth 
and character, the evident sincerity of its purpose, and its freedom 
from bias, prejudice or experimental notion. 

Singular as it may appear, the force, breadth and character 
of this bill are really due to the pressure put upon Congress to pro- 
duce a bill before the Christmas holidays. At the last moments of 
the session the several points in dispute were compromised by throw- 
ing them upon the new Federal Reserve Board, yet to be appointed, 
— just where the power should be lodged. 

In fact the new banking bill puts in the hands of the Secretary 
of the Treasury and the Federal Reserve Board the construction, 
regulation and government of a reserve banking system to be built 
out of the reserves of the national banks, gradually removed from 
the reserve and central reserve cities, and gradually mingled with the 
moneys of the United States Treasury. These moneys, with the 
capital subscribed by the national or "member" banks, constitute 
a basis for the re-discount of commercial paper from the member 
banks and the issuance in this connection of a new national currency 
supplementing the present currency yet protected by a 40% gold re- 
serve obtained from the banks and the Treasury; the whole system 
to be knit together at home and expanded abroad, with power in the 
Federal Board to expand or contract at will, to officer and manage, 
and regulate and name the discount rates for the federal reserve banks 
with possibly more money in their pocketbooks than may be then 
held by the banks now constituting the national banking system. 

In discussing the new bank act the text thereof will be fol- 
lowed and the subjects taken up as in the order of the act, which 
is in thirty sections, and as printed by the government covers twenty- 
six and a half ordinary pages. 



II • 

THE UNDERLYING MOTIVE. 

The new United States banking law is named the "Federal 
Reserve Act." According as the Federal Reserve Board thereunder 
acts it will be a reserve act or an expansion act, the result of which 
no man can foresee. It is not rhetoric to say that all the nations of 
the earth are watching that reservoir of one-fifth of the world's 
gold money which is in the United States and which may readily be 
tapped off if the federal reserve act becomes a federal inflation act. 

The output of gold is not increasing and unless the cost of labor 
is lowered, or men are turned from the factories and cities, it may not 
increase for many years. In the past few years interior India has 
taken 400 million dollars in gold from the civilized world, and not 
oftener than once in 100 years does either gold, silver or copper flow 
back from India. In the opening up of the Orient, China may also 
become a consumer of gold. Even Egypt has pulled upon the 
world's gold supply. The Balkan war scare in 1913 locked up at 
least 300 millions of gold in European strong boxes and stockings. 

The "motif" underlying the Federal Reserve Act is not that 
"which is nominated in the bond." "An elastic currency" could 
have been had by an enactment of 20 lines. The "means of re- 
discounting commercial paper" are already at hand and such dis- 
counts exist to the extent of at least 100 millions in the national 
banking system. It is not "to establish a more effective super- 
vision of banking in the United States," for that could be accom- 
plished by increasing the appropriation and enlarging the salaries of 
the examiners so that men with larger experience and breadth of 
vision would perform more effective supervision. 

The purpose of the act most largely in its inception was "for 
other purposes" and these "purposes" can never be wisely or effec- 
tively carried out; if persisted in they spell disaster to the country. 

The hidden purpose or "motif" which inaugurated this legisla- 
tion, however in effect it may work out under wise administration, 
is to cheapen money. 

The whole primary discussion of this bank 'act was to make 
money easier, to cheapen it to farmer and producer and manufacturer 
and merchant. Senators and representatives both proclaimed, 



THE FEDERAL RESERVE ACT. 11 

within and without Washington, that what they were seeking was a 
financial system that would give us an average rate approaching 
that of the Bank of France where interest over a series of years aver- 
ages between 3% and 4%. They frankly said they hoped for some- 
thing under a 4% rate. 

The charge was that the centralization of reserves in New York 
or Wall Street made money for the bankers and gamblers in that 
"den of iniquity," taxed the country with irregular and high rates 
of interest and repressed commerce, investment and prosperity. 

Therefore, the proposal in outline was that New York should 
be financially carved up; that the reserves of national banks now 
centralized in New York should be taken away and between three 
and four hundred millions of the bank reserves which are now re- 
deposited in that center by the 7500 national banks over the country 
should be removed to other centers of commerce and industry; and 
thereupon should be built an elastic banking and currency system, 
each center serving its own local community, but all interknit, each 
with the other for mutual support. 

Today 7143 national banks, generally classified as country 
banks, are required to keep 15% of their deposits in reserves, of 
which 9% may be kept in reserve city banks. These reserve city 
banks are divided so that three cities, New York, Chicago and St. 
Louis, are known as "central reserve cities" and the 52 banks therein 
must keep 25% of deposit liabilities in their own vaults. Outside 
of these there are 47 "reserve" cities whose 314 national banks must 
carry 25% of their deposits in reserves, one-half of which may be 
held in the banks of the three central reserve cities. 

This makes a concentration of bank reserves in New York city, 
which Congress desired to decentralize. Wall Street was not respon- 
sible for this centralization. The banks of the country and the 
national bank act were responsible. The New York banks never 
originated the system, but, of course, made money out of it. It has 
been figured that they made one-third of 1% per annum upon these 
deposits, but this was not their great profit. The profit came to 
the financial powers in New York who knew the ebb and flow of 
currency, spring and fall, and changed their investments as betwixt 
money, bonds or stock, according to the money currents. New- 
York, as a recipient holder of fluctuating bank reserves, was the 
seat of financial power, and had control of rates and the distribution 
of credit according as money flowed in or out. When money flowed 
in after the country's planting or harvesting, New York bankers 
said who should have it and upon what merchandise, what stocks 
and bonds, it should be loaned. 



12 THE FEDERAL RESERVE ACT. 

Now this is to be changed and Wall Street, and Wall Street 
bankers, see the rightfulness of the change and welcome it. They 
will no longer be burdened with this ebb and flow of money and the 
Stock Exchange and Wall Street will be on a more stable and normal 
investment and speculative basis. Money will not be unloanable 
at 2% at one season of the year and vanishing at 12% at another 
season of the year, with forced fluctuations in stocks and bonds ac- 
cording to the monetary necessities. The money fluctuations are 
primarily due not to the action of Wall Street or Wall Street banks, 
for these are only reservoirs, but to the country banks which call 
their money home and return it at their own pleasure or according to 
their local crop demands. 

To accomplish the re-distribution of reserves it was proposed 
to have 12 regional reserve banks throughout the country, the 
Treasury money and a large part of the bank reserve moneys of 
the country to be removed thereto and there made the basis for com- 
mercial re-discount and an elastic currency to be issued by the 
government through these banks to the national, or member banks T 
who must be the stockholders in the regional reserve banks, paying 
in the $100,000,000 capital in gold. 

New York and other sections declared for a central bank, or 
a reduction in the number of reserve banks, as conducive to strength 
and security. *The final compromise was, as in most other features 
of this bill, left to the new Federal Reserve Board, with headquarters 
at Washington, to determine the federal reserve districts and place 
therein not less than eight nor more than 12 federal reserve banks. 

As New York City represents about one-quarter of the financial 
and banking power of the country, including foreign bankers, private 
bankers, state banks, and national banks, and as New York, with the 
two or three adjoining states naturally tributary thereto in a financial 
sense, should constitute about 40% of the banking capital in the 
regional reserve banks, this city should still be the financial center, 
for its regional reserve bank cannot be otherwise than the real 
central bank. 

Boston, Chicago and St. Louis should have some strength 
within their own territory, but outside of these four cities the regional 
reserve banks will ultimately find their larger function or usefulness 
in the clearance and collection of checks, although of course in the 
aggregate they will do a considerable re-discount business. As 
reserve banks, however, they are too divided to be of any moment or 
consideration in a crisis. 

The crisis, if crisis there ever be, will come about in the effort to at- 
tain that for which Congress has endeavored to legislate — cheap money. 



Ill 

MOST UNPOPULAR MUST BE ITS TRUE GOVERNORS. 

The function of a reserve bank is to hold reserves for future 
emergency. To hold reserves, the discount rate thereat must be 
higher than the outside or open market rate. Then when the open 
market rate advances and the demand closes in on the central re- 
serve, the bank is in control of the situation and in position to supply 
the demand at rising rates of interest. 

On the other hand, if it enters the discount market and com- 
petes with other banks and bankers in the loaning of its reserves at 
low rates, or even normal rates, it makes money easy and borrowing 
easy and buying easy. Prices rise, making that the best market in 
the world to sell in and the dearest to buy in, with the result that 
merchandise flows in while exports fall off, and congestion, both of 
merchandise and of securities, results. When the inevitable end is 
reached the relied-upon reserve power has either disappeared or is 
found wholly inadequate to cope with the situation. 

The entire safety of the situation under this bank act is in main- 
taining "reserve rates" of discount, refusing the popular clamor for 
easier money or lower rates, and, if discounts must be made, the 
accumulation of discount reserves in foreign markets where they can 
be commanded without home disturbance. 

If the new Federal Reserve Board is of the desired quality and 
character it will be the most unpopular board that ever sat in Wash- 
ington. It will turn deaf ears to all political and sectional considera- 
tions. The greater the clamor for cheap money the tighter it will 
hold the reserves within or without the country. It will keep watch- 
ful eye upon every section to see that banking facilities for cornering 
potatoes in Maine, or cotton in Texas; lumber in Oregon or the 
Carolinas; corn in Illinois, or wheat in Kansas or Minnesota, are 
absolutely not furnished by any part of the reserve system over which 
this board presides. It will be watchful over extravagant imports 
that may call money from the country and will know the causes for 
rising and falling prices, so far as they relate to money; and, if within 
its financial domain, it will lend a hand in checking any extremes or 
over-extension of credit to any section, or any industry. It will at 
first frown and then caution; later it will command even to the re- 



14 THE FEDERAL RESERVE ACT. 

moval of every director and officer of any federal reserve bank, and 
their removal under the powers of this Board is absolute and with- 
out appeal. 

No such power in the world was ever before contemplated as is 
now concentrated in the as yet unannounced Federal Reserve Board. 
It is not only the "reserve" banking system in itself, but when rates 
advance it becomes the most autocratic centralized banking power 
that was ever dreamed of in history, irrespective of whether the sys- 
tem embraces only the national banks or includes also the state banks 
and trust companies. 

Just two months before this act was signed by the President, 
or on Oct. 23, Senator Owen, addressing more than one thousand 
persons at the Boston City Club, where his statements would cer- 
tainly be conservative rather than radical, said: 

"I am sure that the great bankers of the country will 
regard with a sigh of relief a condition which will make 
future panic impossible, and which will give us a stability 
of interest rates comparable with that of France. I remind 
you that the interest rate of the Bank of France has been 
three-fourths of the time right about 3%, and has not gone 
over 4% for nearly 90% of the time in the last 50 years. 
These great federal reserve banks can afford to set the stand- 
ard of lending money to the member banks at 3% and 4%." 

The attempt to compete with the Bank of France in low in- 
terest rates will with rising prices invite the return of our investments 
held abroad, for we will be the dearest market in which to buy and 
the best market in which to sell. We will invite the return to us of 
10 billions of American securities held in Europe. France can have 
a low interest rate for she is a great accumulator of wealth and has 
no enterprises within her borders to consume her surplus capital. 
Her wealth must always flow out. It concerns nobody except her- 
self whether her rate is 2% or 4%. England is the creditor of all 
nations. She has a currency in her hankers' pocketbooks that 
gives her a greater per capita circulation at home and abroad than 
any other country in the world. She has #2,500,000,000 of hankers' 
bills due daily or within a few months, which all read "sterling" or 
gold. With these she holds the financial keys of empires. The 
world is her debtor. London's supreme confidence in her own credi- 
tor position is well illustrated in the declaration that the Bank of 
England has only to raise the discount rate and it can draw gold from 
the moon. 

The United States might raise her discount rate and invite gold, 



THE FEDERAL RESERVE ACT. 15 

but, unlike England, she could not command it. England's se- 
curities are all within her own strong boxes and are the titles to 
rivers of interest flowing in upon her ledger balances every month. 
But the United States, rich and powerful as she is above all the 
nations of the earth, is yet loyal slave to creditor owners, and from 
Italian immigrant to the strongest railroad corporation, she is work- 
ing every day to pass gold over to the mother countries. 

If the rate of interest is neither too high nor too low, we shall 
work out in time to financial independence and own all the 135 
billions of wealth now within our borders and many billion more. 



IV 
THE GOVERNMENT UNDERWRITING. 

One of the great instruments to our financial independence will 
be the Federal Reserve Act if rightly administered, because it gives 
the Federal Reserve Board powers to unshackle commerce and make 
the freest distribution of credits by the freest transfers and collec- 
tions when in due time this part of the system shall have been in- 
augurated. To this end our commercial and manufacturing and 
distributing interests should welcome the establishment of regional 
reserve banks and their branches, so that the government may, as in 
Germany, minimize the expense of financial transfers and collections. 

The beginning of this banking system might have been ex- 
pedited had there not been Washington prejudice against financial 
*' underwriting." Yet the United States government underwrites 
the new Federal Reserve System. It provides that any stock not 
taken by national banks, other "member" banks, or the public, 
shall be taken by the United States Treasury. This is in fact an 
underwriting by the government, but, of course, political Washing- 
ton would not harbor such a Wall Street term or thought. There- 
fore, the act provides that the national banks "and every eligible 
bank" shall have 60 days from Dec. 23 to accept its terms, and when 
the federal reserve districts have been marked out, the banks shall 
be given 30 days in which to subscribe to the capital stock. Right 
here might come a mix-up. The directors, or officers, may in behalf 
of the bank accept the act, and the stockholders may decline to sub- 
scribe. There is no penalty. The national banks may accept and 
stay out for a year and then they will be dealt with by the Federal 
Reserve Board. Indeed they may not accept the provisions of the 
act at all and yet may be allowed to come in within the year. Sup- 
pose the state banks and trust companies elect to come in and fill 
up enough capital to start the regional reserve banks — $4,000,000 
•each — and later the national banks elect to come in. There would 
then be a double subscription of capital, for the state banks and 
trust companies are about equal in size to the national banks. 



THE FEDERAL RESERVE ACT. 17 

8TATE BANKS AND NATIONAL BANKS COMPARED. 

We compile from the comptroller's report the following figures 
as of June 4, 1913: 

14,011 1515 

State Banks Trust Cos. Total 

Capital $483,103,779 $452,386,839 $935,490,618 

Surplus 196,271,287 445,285,028 641,556,315 

Undivided profits ... . 88,845,027 129,084,210 217,929,237 
Loans and discounts. .2,746,650,756 2,767,346,174 5,513,996,930 
Bonds, securities, etc. 351,496,853 1,191,019,631 1,542,516,484 

Cash on hand 246,247,125 "285,384,815 531,631,940 

Deposits 3,081,011,582 3,571,361,003 6,652,372,585 

Annexed as of Oct. 21, 1913, are similar data for the 7509 na- 
tional banks, placed beside the above total for the state banks and 
trust companies: 

15,516 
7509 State Banks 

National Banks and Tr. Cos. 

Capital $1,059,402,908 $935,490,618 

Surplus 726,302,377 641,556,315 

Undivided profits 281,275,808 217,929,237 

Loans and discounts 6,288,338,622 5,513,996,930 

Bonds, securities, etc 1,038,971,129 1,542,516,484 

Cash on hand 889,632,454 531 ,631,940 

Deposits (individual) 6,051,689,087 6,652.372,585 

There is not enough money for all to come in and pay in the 
capital and reserves demanded without re-discounts of too large 
volume for "reserve" banks, but, of course, here the Federal Reserve 
Board has power to discriminate and it is not likely that many more 
state banks will come in than will take the place of those smaller 
national banks, which may find.it to their interest to go out. 

It would, however, have been better finance and better business 
for the government, instead of acting as underwriter, to have 
promptly subscribed or set aside the fifty-one million gold which it 
is contemplated the national banks will pay in this year as 3% upon 
their capital and surplus in starting the new system. Later they will 
be called for 3% more. There was at the time of the passage of this 
act one hundred and one million of free gold in the United States 
Treasury and the act had only to set aside fifty-one millions in 
Treasury vaults, subject to the call of the new Federal Reserve Board 
(to be put in their vaults as soon as they were built) , and there would 



18 THE FEDERAL RESERVE ACT. 

be no uncertainty as to the inauguration of the new system. It would 
be started with government capital in gold and then the national 
banks would first be invited to subscribe; then it would have been 
in the discretion of the Federal Reserve Board to let in the state 
banks and lastly the public. With the capital fully taken by others, 
the Treasury would be free of the stock. It may not be material 
in the inauguration of the system; but a little reflection here shows 
how much more direct and efficient are the "underwriting" methods 
of finance than the "underwriting" methods of the government. 
In finance a stock issue is underwritten and construction begun by 
advances against the underwriting even before the public subscrip- 
tions are invited. 

The government in starting the new federal reserve banks 
avoids the business system and without so denominating itself be- 
comes the underwriter but does not get the benefit of the prompt 
determination of the public subscription which underwriting should 
secure. 

At present there is no assurance or positive regulation whence 
will come the subscribed capital or how far the state banks or the 
public will participate therein. There is danger if too few national 
banks come in, and there is danger if too many state banks attempt 
to come in, and there is still further danger if the public comes in as 
a subscriber, and later the national banks insist upon coming in; 
for in the inauguration of this system there is danger ever present in 
the possible disturbance to capital and credits. 

If the national banks alone come in they will pay in their 3%, 
or fifty-three million; 1% as called; another 1% within three 
months, and a third 1% within six months. 



THE SECOND DANGER IN THE LAW. 

As originally proposed the new federal banks were to have a 
capital of 10% on the entire national banking capital, or $100,000,- 
000. This is now to be accomplished by calling for a similar amount, 
but as 6% on the national banking capital and surplus. 

Here there is uncertainty. If the national banks like the situa- 
tion and want more of the 6% cumulative stock of their regional 
banks they may to a considerable extent write from their $300,000,- 
000 of undivided profits into their surplus account; or, if they do not 
like the situation, they may write off a considerable part of their 
surplus. It makes no difference with their earning power, but re- 
duces their liability on stock subscription account. 

If all the national banks and trust companies and state banks 
should -come in there might be $200,000,000 capital subscribed and 
paid in on the basis of 6% of their capital and surplus and this would 
be further liable, as are national bank shares, to a 100% assessment. 

But as before explained there is not money enough in the coun- 
try to permit all the national banks, state banks and trust com- 
panies to come in as shareholders and make deposit to the extent 
required by the act. 

Few persons realize that one of the great dangers in contraction 
and expansion is a fixed reserve requirement making for inelasticity. 
Among the wisest provisions of the act are those for suspension 
(under regulation) of the reserve requirements. 

While under section 2 no federal reserve bank shall commence 
business with a subscribed capital of less than $4,000,000, what is 
there in the act to prevent the starting of a $4,000,000 reserve bank 
and the immediate withdrawal and reduction of the share capital 
by the member banks? For instance, after the $4,000,000 capital 
has been subscribed, if the outlook is not encouraging, member 
banks may immediately surrender their stock and take back their 
payments, thereby and to that extent extinguishing the capital of 
the bank and the "reserve" bank might be continued as a $1,000,000 
bank or a $500,000 bank. Of course, such banks would have to 
leave the national banking system and go into liquidation. 

While the primary danger in this act is inflation, the second 



20 THE FEDERAL RESERVE ACT. 

danger is in this loophole for contraction. State banks and trust 
companies, as well as national banks, would scent trouble in our 
reserve system possibly ahead of the Federal Reserve Board and if a 
few leading banks turned in their certificates and took out their capi- 
tal plus 6% accumulated dividends but "not exceeding the book 
value," who can say how many banks would follow? 

More important than the "reserve" money involved in the 
share capital account is that of the deposit. A bank withdrawing 
would naturally first check out its full deposit. This averages 
about four times as much as the fully paid capital. When called 
upon to make good its "reserve" deposit, it may respond by passing 
up its share certificates, for redemption at the pleasure of the Federal 
Board, and announcing itself as "out," "retired," "metamorphosed," 
or "in liquidation." 

The first requirement as respects reserves of member banks is 
that they keep money in their own bank and next in the regional 
reserve bank; but this reserve is mobile and may be checked against. 

What would a reserve system, a partnership or an underwriting 
be good for, where any member or partner could at the first sign of 
danger take his share and accumulated dividend out of the cash box 
and quit? 

This is the individualism-socialistic character of the bill; you 
are individually free to do as you please so long as you please and 
run away with your money when you please. You are individually 
"it" and above all government compulsion, unless the Federal Board 
promptly makes rules concerning retiring banks — their shares and 
"reserve" deposits. 

The recent marked tendency the world over towards socialism, 
or the expansion of general assessment for individual good, is noted 
in the end of the second section of this act, which appropriates $100,- 
000 out of the Treasury to inaugurate this system; and proposes 6% 
cumulative dividends to the stockholders but does not assess them to 
repay this $100,000 cost of establishing the system. Thirty years ago 
or less this would have been considered the entering wedge to a 
monstrously socialistic system. Now it passes unnoticed and it is 
cited here only as an evidence that in the framing of the bill the de- 
sign i3 to make a good "easy" banking system for the benefit of all 
the people at low rates. It is not even proposed to assure the Gov- 
ernment anything for the use of its credit, and yet for every gold 
dollar deposited a Reserve Bank may accommodate depositors with 
$1.62£ in Government guaranteed paper, in exchange for bank-en- 
dorsed commercial bills, and yet some more paper for a trifling fine. 

In Washington even the wisest financial advisers — so far as there 



THE FEDERAL RESERVE ACT. 21 

were any financial wise ones — said, "Why charge the people, it 
is their own money?" 

These facts are just noted in passing to indicate that the "motif" 
underlying the bill will be found to be the great danger in its execu- 
tion — the demand for cheap money. 

While the bank bill may be socialistic the labor union seems to 
have had no part in its enactment. The Federal reserve banks 
are set up for 20 years unless sooner dissolved by act of Congress, 
or a franchise become forfeited by violation of law; and the -bank 
"may dismiss at pleasure" its officers or employees. Evidently 
the legislators recognize the desirability of discipline and safety 
by giving the bank power to "dismiss at pleasure," although such 
power is denied to the transportation interests of the country. 

It is still apparent that the custody of money must be safe- 
guarded beyond the safety required in travel. 



VI 
THE FEDERAL AGENT AND HIS RESERVES. 

It is presumed that there will be presidents* of Federal Reserve 
Banks, although that official is not directly mentioned. 

In Section 4 it is provided that the bank by its board of direc- 
tors shall appoint "Such officers and employees as are not otherwise 
provided for in'this Act, define their duties, require bonds of them, 
etc." 

Many bankers have assumed from the reading of the Act and 
from the fact that the Federal Reserve Agent is under the Act made 
chairman of the board that that valuable old fogy, otherwise known 
as the conservative bank president, who arrives late and goes early, 
and looks wise, is dispensed with in this most progressive new bank- 
ing act. 

Such, however, cannot be the case. The nine directors, only 
three of whom are nominated by the Government, must run the bank 
as ordinary banks are run in the national banking system. 

A bank here, as elsewhere, must be represented by its president. 
He is more than ever under this bank act the representative of the 
board and the bank, for the Federal Reserve Agent is distinctly the 
representative of the Government and reporting thereto. 

The directors must give their orders through the president. 
The agent, who is chairman of the board, must get his from the 
Government. The functions at times may conflict. The Reserve 
Agent, until the Federal Reserve Board at Washington otherwise 
rules, has nothing more to do with the bank than any other director 
except to preside over the board as one of the nine directors. 

The business of the bank may be conducted for months, if 
not for years, with little reference to the Federal Reserve Agent. 

The moment, however, the bank desires the new currency it 
takes off its hat to the Federal Reserve Agent and says: "Please," 
and he answers, "Hand over your collateral to my custody, give 
me the evidence that it is distinctly re-discounted paper, based upon 
transactions of commerce." 

He must then be provided with a safe or a compartment in the 



'They have been designated "governors. 



THE FEDERAL RESERVE ACT. 23 

vault and becomes the sole keeper of the commercial notes and 
custodian of the new government money, passing it in and out so 
long as the United States Government is in the business of issuing 
paper through that bank. 

When the bank has no notes of the United States Government 
his function ceases except as chairman, director and a reporter to 
the Government. 

The interesting question may arise in the litigation of the future 
as to the divided responsibilities of the bank and the reserve agent 
of the Government as custodian of collateral — commercial notes — 
and of government paper. 

Section 7 relates to division of earnings, and the question has 
been raised as to whether the shares can earn the 6% cumulative 
dividends. 

This will depend in the first instance upon the amount of paper 
the banks elect to pass in for re-discount when making their pay- 
ments on deposit account. The capital must be paid in by gold, 
but one-half of the deposits may be paid in with commercial paper. 
If 200 million paper is paid in or re-discounted at a 6% or 5% rate, 
the banks in the aggregate would have no difficulty in earning 6% 
on a 100 million capital. But if the re-discount rate should in time 
be lowered to 4%, it would take 300 millions of re-discounted paper 
to make 6% dividends and expenses, surplus, etc., estimated at a 
like amount. 

If the system should start with the world's discount rates as 
in 1913, it ought not to have a lower discount than 6%. When 
money is easy at 2% and 3% in the markets of the world, the re- 
discount rate of the reserve banks may safely be lowered, at least in 
the East, to 4%. But when discount rates throughout the world 
become still easier, the regional banks, for safety, should still main- 
tain their 4% rate, go out of the home discount market and accumu- 
late reserves to meet the ultimate effect of rising prices and expanded 
industry which is always stimulated by abnormally low rates either 
at home or abroad. 

The foreign discount market will be as important as the home 
market, and at times more so. 

And the Federal reserve system of this country, if properly 
administered — administered so as to maintain its credits and gold 
reserves in equilibrium — will be the balance wheel for the whole 
world. Its reserves will be accumulated in time of low money rates, 
and its profits will be made and accumulated in discounting at high 
money rates when there is universal demand over the world for 
money. Its safety will then lie not only in the expansion of its note 



24 THE FEDERAL RESERVE ACT. 

issue, but in the removal of restraints from the reserves. Whea 
money rates are low it should not expect to make the 6% upon its 
share capital. When money rates are high, or above 5%, it should 
steadily expand credit at a rising rate of interest and, with that alone 
as governor, support the wings of reserve, and of power over reserves, 
of the regional reserve banks and the member banks. To do this 
effectively the Federal Board must always conserve gold when money 
rates are low and let that and its new currency and all credit fly 
freely to the ends of the earth on bjgh and advancing discount rates. 

One of the first reductions in reserves that might be made in 
due time should arise from the reclassification of the banks. At 
the end of three years all bank reserves are removed from reserve 
city banks and central reserve city banks. There is no reason for 
requiring an 18% reserve in the three central reserve cities and 15% 
in reserve city banks. 

Under section 11, paragraph E, power is given the Federal 
Reserve Board "to reclassify existing reserve and central reserve 
cities, or to terminate their designation as such." Under this clause 
the central reserve cities might at first be reclassified as reserve cities, 
thus reducing their reserve from 18% to 15%, and later the reserve 
city designation might be abolished, thus reducing all bank reserve 
requirements to 12%. 

Under our new reserve law, city bank reserves are not actually 
reduced from 25% to 18% and 15%, as would appear by the reading 
of the bill. Before determining the net deposit against which 25% 
reserves must be kept, the "due from banks" may be deducted from 
the "due to banks." Therefore, New York need not hold 25% 
against all the deposits placed with it by banks; and, on the whole, 
its 25% reserve requirement means only about 21% against gross 
deposits. By the new law the redepositing of bank reserves as now 
practised is in three years abolished, and bank deposits in other 
"member" banks become individual deposits. Many city banks 
will find that their reserve requirements are actually increased. 

In the last days preceding the passage of the banking bill a 
leading banker, representing the St. Louis banks, arrived in Washing- 
ton and cried, "Hold up! You are not reducing our reserve require- 
ments. You are increasing them. St. Louis banks now hold only 
17.2% of their gross deposits under the 25% requirements. You 
are now forcing us up to 18%!" He proposed amendment to the 
law. But he was too late. The bill was rushed through on the false 
theory that the country needed immediately the new money that 
might be created under it, and also with the understanding that it 
might be soon amended, where amendment was found necessary. 



THE FEDERAL RESERVE ACT. 25 

It was pointed out that the national bank act itself has been amended 
by "57 varieties." 

If the 7100 country banks, most of which are well distant from 
reserve banks, need only a 12% reserve, of which only one-half 
need be kept in their own vaults, certainly the central reserve city 
banks, with a re-discount privilege at their Federal reserve bank in 
the same city, need keep no more in cash. When they need money 
they have only to step across the way and re-discount their bills or 
commercial paper and receive credit to bring up their reserve, which 
have been checked out at the Federal reserve bank, or get Federal 
reserve currency, if that is needed to meet the payrolls of their cus- 
tomers. 



VII 
INDEPENDENCE OF THE RESERVE BOARD. 

The question is often asked as to wherein the political character 
of the Federal Reserve Board was essentially changed from the 
House Bill since a new Administration during its term of office can 
change the character of the board. An illustration from life in- 
surance may make this clear. Formerly any suicide forfeited his 
life insurance. Under the modern insurance policy, the man who 
does not commit suicide within a reasonable time is not regarded as 
having taken out a policy in fraud or with intention to commit sui- 
cide. If he commits the act years afterward, it is due to mental 
aberration, sickness, or causes not contemplated when he took out 
the policy. There is a change of state that causes the act, and he can 
be insured against this just as against any other form of accident or 
illness. 

When a new Administration comes in, it places upon the Federal 
Reserve Board of seven members a new Secretary of the Treasury 
and, possibly, a new Comptroller of the Currency and during the 
first year nominates a new member of the Board. Then for two years 
the new Administration is in the minority. 

If in that time the conservative members of the Board, ap- 
pointed for ten years, have not been able to educate their new as- 
sociates to their form or methods of control, it is time for a seasonable 
change and the Administration may then prevail. But there has 
been nothing accomplished by haste or hasty radicalism, and four 
of the nine members during that Administration with their presum- 
ably large experience are there to watch and protect. And there are 
behind them the regional reserve banks with their six out of nine 
directors elected by member banks and there is also the advisory 
council created by Section 12, and elected by Federal reserve bank 
directors, one for each Federal reserve district. They meet at least 
four times a year in Washington to (1) "confer directly with the 
Federal Reserve Board on general business conditions;" (2) "to 
make oral or written representations concerning matters within the 
jurisdiction of said board"; (3) "to call for information and make 
recommendations in regard to discount rates, re-discount business, 
note issues, reserve conditions," etc. 



THE FEDERAL RESERVE ACT. 27 

Under these restraining influences it is safe to say that it would 
take two Administrations to fully change the character of the Board, 
and if the Board were rightly constituted at first it would, by practi- 
cal education, convert radicals to conservatives. 

The members of the Federal Reserve Board have little to look 
forward to beyond their ten years of service and the honor of such 
service. To perform their duty aright they must be unpopular and 
they are forbidden to enter the banking business, for two years after 
they retire, by "any office, position, or employment in any member 
bank." 

The danger in the Federal Reserve Board membership is that 
an unscrupulous Administration might pay its political debts through 
two terms by the appointment of weak or incompetent men thereto. 
But this would reflect upon the Administration. The Board's 
usefulness and influence might then gradually disappear and the 
conduct and conservation of the banking system remain with the 
Federal reserve banks, whose directors being appointed by the mem- 
ber banks in that district must for safety take up the duties of con- 
servation so far as the Federal Board dropped them. 

Should there arise an issue between the different sections of 
the country — a weak Federal Reserve board forcing low discount 
rates, which might be availed of in the newer sections of country — 
the older reserve sections might immediately conserve their reserve 
forces through their foreign agencies or establish foreign branches 
as they may do under this Act, and discount abroad for reserve pur- 
poses, and answer to the Federal Reserve Board, when called upon to 
re-discount for the newer sections, "We are full up and you cannot 
ask us to pay the legal penalties for drawing upon our reserves. You 
can transfer your Government money to the weaker banks and be 
responsible for their security, but you can take your choice between 
letting us alone or permitting us to withdraw and dissolve the regional 
reserve bank in our district, after which you may set it up again by 
any public subscription you may be able to command." 

It would seem therefore as though the protection against radical- 
ism, within or without, or from Washington, or from political parties, 
was fairly complete. 

Its completeness is due to the pressure the Administration put 
upon Congress for prompt passage of some bill before Christmas, 
and Congress had to throw matters of dispute into the powers of the 
Federal Reserve Board. To get the banks to come into the system, 
they gave the control of the regional banks to the member banks, 
and threw in other safeguards. 

The possibilities of expansion, both in note issue and rc-dis- 



28 THE FEDERAL RESERVE ACT. 

counts, by a possible conspiracy between all the member banks and 
regional reserve banks and the government at Washington, may !»c 
later considered academically. 

Such expansion, however, from a practical point of view ran 
be better considered in a year or two, when the regional reserve 
banks have, as contemplated in the Act, established foreign agen- 
cies and branches and entered the discount markets of the world 
and brought home the instrumentalities of exchange common in 
Europe*, such as international drafts, endorsed bills, acceptances, etc 

The powers of this act are so broad as to put our national bank- 
ing system into the markets of the world for everything in the way 
of loaning, or buying, gold and exchange and lending and accepting 
on pretty much everything from gold to merchandise; but to the 
member banks is reserved the dealing in, and loaning upon, stocks 
and bonds. The regional reserve banks must deal with gold and the 
instruments of exchange which relate to merchandise and commerce. 
In their vaults must be kept gold, money and commercial bills or 
acceptances based upon the commerce of the country. This gives 
great possibility of expansion in the stock and bond market to all t 
member banks and state banks and trust companies and private 
bankers. Fundamentally, the new bank act relieves Wall Street, 
not only of a part of its bank reserves, but of its commercial paper, 
and leaves it with opportunity to grow on a sounder investment 
basis, and to grow as it never grew before. 



VIII 
REDUCTION IN BANK RESERVES. 

A large portion of the trouble in the American banking system 
has arisen from a high fixity of reserve without penalty in fines, or 
any regulated interest rates, when depositors draw their money from 
bank reserves. Banks under the National Bank Act are forbidden 
to make new loans the moment there is a deficiency in their reserve 
requirements but they are permitted to renew existing loans. The 
moment a bank refuses to discount for its depositors, the withdrawal 
of reserves by the depositors begins. 

All novices in banking fail to understand why deposits disappear 
when loans are curtailed. They do not realize that deposits arise 
largely from loans. 

The bank president who does not understand that discounts 
make deposits is very much in the position of the old lady who 
declared that throughout her life she had never been able to under- 
stand why her hens were the most obstinate in the world. Whether 
she brought up Plymouth Rocks or Rhode Island Reds, when eggs 
commanded good prices her hens would never lay. When business 
is booming and money is in demand the conservative bank president 
is apt to curtail his loans and then wonder why his deposits run low — 
he finds his hens won't lay. Also when a bank strikes its fixed re- 
serve and refuses to loan, away fly the deposits. 

What fixity of reserve means may be illustrated from the fact 
that with $3,400,000,000 money as at present in the country a 
general requirement of 25% for state and national banking reserve 
would absorb all the money in the country when the deposits in the 
banks reached four times this sum, or §13,600,000,000. 

Individual deposits in national and state banks last June were 
just about $12,700,000,000. Fortunately, however, the cash re- 
serves in the state banks and trust companies were only $532,000,- 
000, against $890,000,000 in the national banks. The deposits of 
the state banks (including trust companies) were the larger by 10%, 
yet their cash reserves were $360,000,000 less. Had the state banks 
attempted to carry cash reserves equal to the national banks, we 
should have been in financial trouble. 

In December, 1913, the country was bumping along with little 



30 THE FEDERAL RESERVE ACT. 

margin in its banking reserves and business by no means at the 
maximum. Had the reserves with state and national banks been 
universally at 25%, the people could have held in their pockets 
(on the basis of their bank deposits) less than $2 per capita. 

The 7500 national banks in the country carry about $900,000,- 
000 cash, which, applied to the individual deposits of $6,000,000,000, 
makes a cash reserve of just about 15%. 

These figures do not include eredits between banks. The bank- 
ing system is here treated as a unit in respect to what it owes in- 
dividual depositors and what it holds in cash to meet the individual 
depositors' liability. 

Altogether, the state and national banks hold steadily month 
in and month out about $1,400,000,000 in money, which is 44% of 
the money the Treasury Department, by its figures, declares monthly 
to be "in circulation." 

With the money in savings and private banks this 44% may 
sometimes approach 50%, or one-half the money of the country. 

Any encroachment upon this half of our money is viewed with 
alarm, and any serious dip into it creates such a panic as causes 
people to use the lever of $12,700,000,000 of deposits to get their 
part of the $i, 400,000,000 of money remaining in the banks as re- 
serves. Including savings and private banks the total of individual 
deposit is easily about 17 billions. 

Some bankers have declared that any fixity of reserve is a danger 
and that there should be no such fixity. They maintain that any 
bank reserves should be according to the necessities of the situation; 
that while some bankers might very properly conduct their business 
year in and year out with no more than 5% of their deposits in their 
cashdrawer, other bankers according to the character of the demands 
upon them might well require nearer 50%, and that fixity of reserve 
creates alarm instead of confidence. 

Reverting to the above figures it may be noted that the national 
banks and state banks combined hold only 11% of their deposits 
in cash reserve. It may well be doubted if this percentage of reserve 
ever varies materially in normal times. Reinforced by United States 
Treasury moneys and other reserve moneys properly centralized it 
may well be reduced as is contemplated in the Reserve Act. 

Recent computations have been made indicating that the 
gigantic banking business of Great Britain is carried on with less than 
7% of reserve moneys, — (>£% is the actual figure. All effort from 
economic writers and theorists of the whole world to induce England 
to carry a larger gold reserve has been unavailing. In the first ten 
years of this century England did not increase her gold by so much 



THE FEDERAL RESERVE ACT. 31 

as 10% when France was increasing hers by 75%, Germany by 43%, 
and the United States by 106%. 

Of course, the reason you cannot get up a gold scare in England 
is because her bankers' pocketbooks are filled with international 
bills payable in gold and her bankers can raise the rate of discount 
at any time and command gold payment from all corners of the 
earth. 

If the $2,500,000,000 invested in England in international 
bills was to be transmuted into the medium of bank deposits before 
its investment in commercial bills and a 25% gold reserve required 
against it there would be "music in the air." 

With our extravagant treasury and banking system and fixed 
and useless reserves we have had a measure of salvation in this coun- 
try through the private bankers. It has -been estimated that at 
times a thousand millions of deposits were with the private bankers 
of New York City, or about as much as was held a few years ago on 
deposit with New York national banks. State banks likewise held 
another billion of deposits. Now had the deposits of the state banks 
and the private bankers been thrust directly into the national banks 
of New York City and a 25% fixed reserve set up against them there 
would have been a considerable strain in the financial situation, for 
the billion in the state banks had less than 15% reserve, and the bil- 
lion with the private bankers could for the most part be loaned out 
and nobody question the ability of the private bankers to pay on 
demand. They could keep 25% of this billion as their reserve and 
deposit the same in the national banks where the bank's 25% re- 
serve becomes only about 6% of the total of the deposit with the 
private bankers. 

Thus do large deposits of money filter through private bank- 
ing hands and find a 6% basis of money reserve all-sufficient. 



IX 
PltlMARY CREDIT EXPANSION. 

The greatest fallacy concerning the new bank act is that the 
primary inflation is to come through the issue of the new notes or 
even through the regional reserve banks. 

Startling as it may appear, the inflation is with the member 
banks, or in the national banking system. 

When a regional reserve bank under control of the Federal 
Reserve Board is required to keep a 35% reserve against deposits 
and an additional 40% in gold against its note issues, inflation may 
be broad but is neither primary nor necessarily sudden. When a 
dollar is deposited by a member bank (and the new banks do busi- 
ness with no other depositors) , that dollar must have 35 cents clipped 
off and put aside as reserve against the deposit liability. If later 
this member bank presents its endorsed mercantile paper to the 
regional reserve bank for re-discount, the amount of the re-discount 
passes to the credit of the member bank and again 35% in lawful 
money must be set aside in the reserve account against this deposit 
liability. 

Soon the member bank's currency runs low and the date ap- 
proaches for the member bank to furnish a large manufacturer-de- 
positor with his weekly or monthly payroll. The member bank 
thereupon goes to the reserve bank and takes out bills against the 
manufacturer's endorsed paper which it had recently re-discounted 
or any other re-discounted commercial paper. Against such bills 
the Federal reserve bank must hold 40 cents in gold for each dollar 
in paper put out and the Federal Reserve Agent must hold in cus- 
tody the commercial note that is behind it. 

Therefore, in effect the reserve bank has an endorsed mer- 
cantile promise to pay a dollar, has 40 cents in gold, 35 cents in 
lawful money and a 25 cents surplus to balance a deposit liability 
of a dollar and a federal note liability of a dollar. It may readily 
be seen that the 25-cent surplus for the next expansion may not at 
first carry very far. 

The expansion in the aggregate may be treated later and there 
are ways in which it can be made very large. These figures are only 
to show the small primary expansion with the reserve notes, dis- 



THE FEDERAL RESERVE ACT. 33 

counts and deposits, as compared with member bank possibilities 
under reduced reserves. 

Now, if national banks can carry six billions of loans upon 900 
millions of real money the reserves are 15%, as previously noted, and 
individual credit expansion is as six to one. 

Reduce the reserve requirements as in the Federal Reserve 
Act by 7% on the $1,500,000,000 in Central Reserve City banks, 
and by 10% on the SI, 900 ,000,000 in Reserve City banks, aDd by 
3% on the $3,700,000,000 in the Country Banks, and we have re- 
duced the reserve requirements on $7,200,000,000 "net" bank de- 
posits by 6|%, or $405,000,000. 

This reduction of $405,000,000 in reserve requirements cannot 
be applied in reduction of the $900,000,000 present cash in the na- 
tional bank system, because a part of the reduction is in the credit 
reserves and a part in the cash reserves and, furthermore, the reduc- 
tion in reserves is figured not only on the $6,000,000,000 individual 
deposits, but the entire net deposits of $7,200,000,000 which include 
$1,200,000,000 net deposits of banks with other banks. This matter 
of "net" deposits is a little technical for the lay reader and may be 
dismissed from present consideration for present purposes. It is 
expected to undergo a considerable change in the next five years 
and if the Federal Reserve Act works smoothly, be largely eliminated, 
bank reserves which are now carried in central reserve and reserve 
city banks being largely transferred to the new reserve banks. 

The purpose here is to treat the 7500 national banks as a unit 
and deal with their deposit and cash accounts as though they were 
consolidated into one bank with credits between the banks eliminated, 
in order to ascertain the reduction in cash reserves permitted under 
the new act, and their relations to the individual deposits. Cash and 
individual deposits are the center and the rim of the entire national 
banking system. This calculation also is based upon the assumption 
that there is no material change at first in credit relations between 
national banks and that the country banks maintain deposits with 
the city banks at first about as at present. 

Immediately the announcement is made of the establishment of 
regional reserve banks there is a reduction of 7% in the reserve re- 
quirements of the central reserve city banks holding $1,500,000,000 
in deposits. This makes a drop of $105,000,000 in the reserve re- 
quirements of banks in New York, Chicago and St. Louis. With no 
offsets it would be about the equivalent of the sudden arrival of $100,- 
000,000 gold from Europe, which Wall Street would instantly figure 
as good for $500,000,000 of additional credit spread over the country. 
There is also a reduction of 10% reserve requirement in the $1,900,- 



34 THE FEDERAL RESERVE ACT. 

000,000 deposits in the reserve city banks. The banks in the 47 
reserve cities, Boston, Philadelphia, etc., keep one-half their 25% 
in cash, and the other half is redeposited in the central reserve cities. 
Therefore, the reduction here from 25% to 15%, of which 6% must 
be in their vaults, means only a 6£% reduction in the cash reserve 
requirements, or just a drop of $120,000,000, making possible, Wall 
Street sharks would figure, another credit expansion, and to the 
extent of $600,000,000. 

The country bank reserves are reduced from 15% to 12% but 
here there is a reduction of only 1% in the cash requirements at 
first and another 1% reduction in the cash requirements at the end 
of three years. Country banks are now required to keep 6% in 
cash and may keep 9% with city banks but under the new act their 
cash requirements are reduced at first from 6% to 5% and at the end 
of36monthsto4%. 

The 1% drop here means at first a reduction in reserve require- 
ments of $37,000,000, or by 1% on $3,700,000,000. 

The total reduction in the cash requirements of all banks im- 
mediately on the inauguration of the reserve system is, therefore, 
above $260,000,000, and this may be taken right off the $900,000,- 
000 real money in the banks. In other words, we could export $260,- 
000,000 of gold and still maintain our $6,000,000,000 of individual 
loans and deposits. This is what Europe, if not the whole world, is 
watching with open mouth and tongue moistened for an industrial 
expansion thereupon. The problem is, will Europe or Wall Street 
get it? If it remains here it changes the ratio of cash requirements 
under our national banking system as from one to six to one to nine, 
making possibly nearly a 50% expansion in our bank credit system. 
In effect this means an invited expansion of credit with the member 
banks of between two and three billions. 

This is sufficient to last this growing country for some years. 
The interesting problem is, how quickly will Wall Street, industrial 
America, or gold-hungry Europe, get this two or three billion of 
credit expansion. 

Much depends upon the wisdom of the federal reserve board. 
They have power to transmute this possible two billion of expansion 
into real contraction. An illustration may be had with the country 
banks who have one-half of the country's deposits, and who are now 
obliged to keep only 6% in cash and may keep 9% with city banks 
as reserve credits. Their city bank deposits are to be eliminated in 
their reserves and if their elimination is ordered by the federal board 
to be transmuted into cash and held in cash in the regional reserve 
banks and in their own vaults, there can be very great contraction 



THE FEDERAL RESERVE ACT. 35 

by this transmutation of what are now banking credits into cash. 

Today against the country banks' $3,700,000,000 net deposits 
only G f ( cash is required. When the act goes into effect 5% is 
required to be held in their vaults, 2% is paid in to the regional re- 
serve banks, and 5% may be held in either their own vaults, or the 
regional reserve banks, or with any reserve city banks; but each six 
months 1% u withdrawn from the reserve credits until the reserve 
credits are entirely eliminated and put in cash, or with the regional 
reserve banks. So that 6% now held in cash by the country banks 
on one-half the bank deposits of the country may be by act of the 
federal reserve board and the conversion of bank credits into cash 
made to become 12% cash divided between the country banks and 
the federal reserve banks if the federal board elects to hold all in 
cash. 

This would mean that the reserve banks and the country banks 
held in their vaults §444,000,000 cash, or 12% in cash, where now 
there is 6% in cash and 9% in reserve credits with other banks. 

With the reserve city banks, while their reserves are nominally 
reduced from 25% to 15% and the 25% made only half cash and the 
other half credit with other banks, it is within the power of the 
federal board to decree that the entire 15% shall be cash, by holding 
the cash in its own vaults and eliminating all credits from reserves 
either held by itself or central reserve cities. In other words, while 
one-half of the 25% reserve was cash, it is possible for the federal 
board to make the entire new 15% all cash. 

It must be added right here that these reduced reserve require- 
ments take no account of the $400,000,000 reserve transferred to the 
Federal Reserve Banks during the next three years, or the $107,- 
000,000 paid in for its capital account. Both these requirements 
may in the next few years be met from the member banks' invest- 
ments which on Oct. 21 last were $1,038,971,129. 

We will not attempt to teach our grandmother bank presidents 
how to suck eggs. They will, before three years are out, see the 
wisdom of parting with their investments on rising markets and they 
will see the wisdom of putting the funds thus realized into expanding 
loans; for loans make deposits and both are profitable in periods of 
rising prices. 

It is figured that a dollar imported from abroad and placed 
in the banking system now causes an expansion spread over the 
system of five or six for one, as is shown by the above figuring. 

What will now be the expansive power of a dollar placed in the 
national banking system when the reserve requirements are reduced 
from the proportion of one to six to one to nine? Will it mean a 



36 THE FEDERAL RESERVE ACT. 

possibility of two billion of credit expansion with the member banks 
before the reserve banks are resorted to for their possibilities of ex- 
pansion? 

The railroads will have no credit for their stocks and bonds with 
the new Federal reserve banks. They are expressly barred in the bill. 

But the unlisted industrial that desires under our new tariff 
bill to manufacture for Chinese markets has only to borrow and make 
deposits and there will be credit expansion enough to assist in the 
commercial regeneration and elevation of the Orientals. We may 
yet sell rails and locomotives to China, if not to American railroads. 



X 
POLITICAL PRINCIPLES. 

One must understand the political principles underlying the 
Federal Reserve Act before one can hold a clear conception of its 
aims or the ends to be attained. 

It is quite another matter as to how wide of the mark aimed at 
will be the resultant working out of the Act in practice. 

The world is moving forward in all forms of human develop- 
ment, materially and financially as well as mentally and socially, 
and at a pace never dreamed of a hundred years ago. 

Only within a few years has the eye become accustomed to the 
electric light, or the blazing, fluttering electric candle been so sub- 
dued that the human eye could become accustomed to it. Thou- 
sands of people object to placing a telephone to their ears. The 
trolley train is still a marvel to grandmother and grandfather when 
they drive to town. Automobiles are denounced by financiers who 
regard human progress as possible only by human savings, and en- 
vious boys still throw stones at them upon some highways. 

Dime novels with Indian scouts and scalpers are no longer in- 
teresting. Yellow journals and magazines, after political scalps, 
are more thrilling for the growing youth. Jules Verne is no longer 
a wonder when Zeppelin, Grahame-White and Orville Wright are 
actually building and rebuilding in sharpest rivalry to determine 
which of the three great nations of the earth shall first make over-the- 
ocean by air transportation a reality. 

Financiers often forget that the whole body of humanity is 
moving mentally and socially quite as rapidly as material things are 
moving within the domain of finance. You must take a broad sweep 
to see what is really under the Federal Reserve Act politically, for, 
after all, political movements are but the reflex of human social 
movements and the endeavor to embody in law the aims of human 
progress . 

All human growth is by mental contact. This is narrowed in 
the youth of humanity. The family relation is developed and de- 
fended. The tribal relation broadens and defends. Next comes 
the state with its army, and the city with its walled defences. 
Thence spring nations with navy and tariff walls. And within 



38 THE FEDERAL RESERVE ACT. 

family, and tribe, and state, and nation, is the centralized financial 
power— all for purposes of protection, defence, and individual up- 
building — by concentration. 

Now in this new age of the world comes the demand for human 
unity. Neither the Turk, the Bulgarian, nor the Mexican can any 
longer remain isolated in the human family. Every nation has an 
interest in the development, progress and trade relations of every 
other nation. Civilized nations are acting together. Inched. 
civilization itself seems moving as a unit throughout the world. 

Just so fast as this unit of humanity in civilization unites and 
solidifies, it is an irresistible power making for the decentralization 
of the older forces. No family is big enough, whether of kings and 
queens on thrones, or interlocked finance, or unions of trades or of 
labor, to now consider itself socially isolated and able to legislate and 
rule independently within its own borders. 

Where formerly the word was "centralization," today the rule 
and the law is "decentralization." "Shippers, choppers and 
ploughmen shall constitute a state." Tariff walls are beaten into 
treaties of reciprocity and commercial unions. If Canada would 
not have a reciprocity treaty, we commercially annex her by taking 
down our tariff and making her prices our prices, for lumber, cattle 
and food products. 

The Federal Reserve Act is an act of decentralization. It 
seeks the establishment of other financial centers co-ordinated 
through a Federal Reserve Board at Washington. Finance and 
banks are for the people and human development. The people do 
not exist for the banks, or for potential and highly centralized 
finance. 

The financial powers that still contest for the old system of bank- 
ing concentration will soon find themselves lonesome relics of a by- 
gone age. The new age is upon us, and he who would now argue for 
a strong central bank for the fifty nations or states within our Union 
will be found to be of the church or faith that holds that trolleys 
should be annexed to steam railroads, automobiles should not be 
cheapened for popular consumption, immigration and the voting 
franchise should be sharply restricted, that education is too univer- 
sal, that too many people travel at home and abroad and that crowds 
do not belong in their church or their street. Nevertheless, the new 
age is upon us. It is the universal age; it is the age of humanity; 
it is the age of decentralization of all powers that the individual unit 
of humanity may enter in. 

With this conception we can go forward to a true understanding 
of the Federal Reserve Act which seeks to promote more banks, 



THE FEDERAL RESERVE ACT. 39 

more financial centers, more commerce and more centers of com- 
merce, lower and more stable interest rates, freer interchange of 
goods, and freer collection in the financial exchanges relating to 
commerce. 

This is why the new Reserve Bank Act if rightly put into 
operation may be as big as the Constitution of the United States, 
as was declared in the first of this series of articles. 

Under wrong administration, or inauguration it may become 
like the Articles of Confederation, which in breaking revealed their 
defects; but their principles budded forth in a new Constitution 
which, with amendment, has stood for more than a hundred years. 

This Federal Reserve Act, although named for 20 years, or its 
successor with amendment, is designed to stand for at least a hundred 
years as the promoter of commerce, the well-being of all people and 
human development through the exchanges of commerce freed as 
far as possible from the gambling transactions, either of commerce 
or finance. 

It is regrettable that New York has not better comprehended 
the purposes of the new Federal Reserve Act. Before Secretaries 
McAdoo and Houston as the preliminary organization committee, 
New York argued for the annexation of other commercial and finan- 
cial centers that a strong bank might be here set up. New York 
argued over a dead issue. 

The whole purpose of the Act is decentralization with centralized 
direction. New York will be better off before the whole world, and 
Wall Street — that longest street in the world — will be longer and 
straighter when the national bank reserves of this country have been 
decentralized from Wall Street and Federal control over bank re- 
serves set up. 

This decentralization with reduction in reserve requirements 
gives such vast powers of expansion that the reader should study 
carefully the figures of the previous article before attempting to 
grapple with the tables to follow. 



XI 
EXPANSION AND CONTRACTION. 

A clever millionaire, who has his millions sometimes in cash 
and sometimes in securities, was asked if he had read the ninth article 
of this series on the Federal Reserve Act. "Not yet," he replied. 

He was asked if he had read the Bank Act. He replied laconi- 
cally, "No." 

"Why, how can you handle your property and not know the 
law in relation to which it must exist for many — " 

"Tut, tut, I have no time to read. Does not the law say 'elas- 
tic'? That is enough for me. How can it be elastic without ex- 
pansion?" 

While the inauguration of the new Federal Reserve banking 
system presents the possibility of above two billion credit expansion 
by member banks before the beginning of note expansion by Federal 
Reserve banks, the first provision of the Act to go into effect is, most 
singularly, a measure of contraction. 

Until the Secretary of the Treasury announces the establish- 
ment of Federal reserve banks there is only one change in the 
existing national banking system and that is that national banks 
may no longer count in their cash reserves the 5% fund held at Wash- 
ington for redemption of national bank notes. This is about 35 
million on the 700 million bank notes outstanding. 

While the Act was under discussion the reserves of the country 
were very low and it is inconceivable that Congress intended, as 
preliminary to the inauguration of this new system of expansion, to 
withdraw 35 millions from the bank reserves and at a possibly crucial 
time. 

The universal proclamation from Washington was reduction 
of reserves and easing of money. Yet the first provision of the Act 
put into effect was "from and after the passage of this Act such fund 
of five per centum shall in no case be counted by any national bank- 
ing association as a part of its lawful reserve." 

Either there was no immediate necessity for the new bank act 
in relief of the money situation, or the proposition for the immediate 
contraction of 35 million in the reserves was an error. 

The intention clearly under the general purpose of the Act 



THE FEDERAL RESERVE ACT. 41 

was to withdraw this 5% fund from the reserve when the reserve 
requirements should be reduced so sharply on the inauguration of 
the system. 

The banks did not realize this provision of the Act until after 
the turn of the year, and the beginning of the inflow of money to the 
banks. 

In effect it was an added export of gold, but taken universally 
over the whole country, and brings our money "exports" for 1013 
to above $100,000,000. 

The only other error in phraseology thus far discovered is that 
which permits the reserve city banks for three years after inaugura- 
tion of the Act to keep their optional reserves with each other.* 

This clause which permits country banks to keep their optional 
reserves for 36 months in their own vaults, or in the Federal Reserve 
bank, also contains the alternative, "or in national banks in reserve 
or central reserve cities as now defined by law." 

This is eminently proper, as country banks are now permitted 
to keep reserves in both reserve and central reserve cities, but the 
same phraseology is repeated in regard to banks in reserve cities, 
obviously an oversight unless it was designed as a further attack 
upon New York City and intended to give, for illustration, cities 
like Albany an opportunity to bid against New York for reserve de- 
posits from Philadelphia and, Boston, or vice versa. 

Banks of the Boston and Philadelphia class have, disregarding this , 
three options when their reserve requirements on the inauguration 
of the system are reduced from 25% to 15%. Six of this 15% must 
be kept in cash, instead of 12| of the 25% as at present; 3% must be 
placed with the Federal Reserve bank; and 6% is optional. It may 
be held in cash; with the Federal Reserve bank, or in central reserve 
city banks. 

It is not, however, likely that there will be any great shifting 
of reserves, for at the end of the first year the Federal Reserve bank 
takes up 1%, in six months thereafter another 1%, and a third 1% 
at the end of two years. A year later, or at the end of 36 months 
after the inauguration of the system, the cash requirement is reduced 
from 6% to 5%, and the amount of optional reserve is increased from 
3% to 4%. Thereafter no reserve can be counted except its cash 
in the bank vaults or with the Federal Reserve bank. 



* Note. This was corrected by amendment Aug. 15, 1914. 



XII 
CAN STATE BANKS QUIT THE NATIONAL SYSTEM.' 

There seems to be a general impression that a state bank 
or trust company which enters the Federal Reserve System can 
withdraw at will. The act makes no explicit provision for the 
termination of the membership of any member bank except by 
liquidation or insolvency. It is true that it is a matter of option 
with a state bank or trust company whether or not it comes into the 
system, whereas with a national bank it is a matter of compulsion. 
But if a state bank or trust company voluntarily comes in, so far 
as its membership is concerned, it stands on the same basis as a 
national bank and is subject to the same duties and liabilities. 

It is suggested that if a state bank gets tired of its membership 
in the system, all it is necessary for it to do is to check out its reserve 
on deposit in the Federal Reserve Bank and turn in its stock for 
cancellation. There is no authority in the law for cancelling the stock 
under these circumstances, and if the bank checks out its whole 
reserve, it then becomes subject to the following provision: "No 
bank shall at any time make new loans or shall pay any dividends 
unless and until the total reserve required by law is fully restored." 

As respects state banks they would appear to have the right to 
come into the system in two ways: Under section 8 by a vote of 51% 
of their capital stock and with the approval of the Comptroller of the 
Currency they may "be converted into a national banking asso- 
ciation, with any name approved by the Comptroller of the Cur- 
rency." 

But section 9 permits them to become stockholders in a Federal 
Reserve Bank and the Federal Reserve Board shall establish by-laws 
to deal with state banks becoming members and "such bylaws shall 
require applying banks not organized under Federal law to comply 
with the reserve and capital requirements and to submit to the ex- 
amination and regulations prescribed by the organization committee 
or by the Federal Reserve Board." However, provision is made to 
insure that state banks joining the system are subject in some other 
respects to similar rules as the national banks, so that unfair com- 
petition between them may be prevented. 

The Federal Reserve Bank upon notice from the Federal Reserve 



THE FEDERAL RESERVE ACT. 43 

Board may suspend a state bank "from further privileges of member- 
ship" and it "may restore membership." 

It would also seem to be within the power of the Federal Reserve 
Board in establishing bylaws to make regulations under which the 
state banks may retire from the system. 

Until then any state bank attempting to leave the system by 
withdrawing its reserves from the Federal Bank might be interested 
in the end of the sixth paragraph of Section 2, which provides that 
for violation of the Federal Reserve Act, 

"Every director who participated in or assented to the 
same shall be held liable in his personal or individual 
capacity for all damages which said bank, its shareholders, 
or any other person shall have sustained in consequence of 
such violation." 



XIII 

THE OLD AND THE NEW RESERVES. 

Having shown in Article 9 the possibility of two billion credit 
expansion in our banking system, beginning in 1914, by the two 
hundred and sixty million reduction in the reserve requirements, 
two interesting problems immediately arise: First, as to how soon 
such an expansion may begin actively, and then through what class 
of banks the distribution of credit will take place. 

The third question as to who will get the benefit of the credit 
expansion, agriculture, industry or transportation, and how far the 
results will be divided between capital and labor, may be considered 
later, for that is the ultimate and not the primary problem. 

Bankers who have their nose to the grindstone say, "Why! 
we cannot start a bank without a year of preparation. It takes 
study to locate a bank and then it takes a year to build a bank vault, 
although meanwhile the clerical organization and internal system 
may be all arranged for." In reply it may be said that the regional 
reserve banks require no ground floors and until they have taken up 
the clearing house function they require no new buildings and no 
large spaces. The business can be done on the second floor and the 
government already has the machinery to quickly provide the clerical 
organization. The question of the bank vault may be readily solved 
by the use of the United States Treasury and its sub-treasury sys- 
tem. There are sub-treasuries in this country in the following cities,, 
besides the Treasury at Washington: 

Boston, Chicago, 

New York, St. Louis, 

Baltimore, New Orleans, 

Philadelphia, Cincinnati. 

San Francisco, 

These have the vault accommodations needed at first. 



THE FEDERAL RESERVE ACT. 45 

Should Denver or Seattle be selected, their names can be found 
in this list of United States mints and assay offices: 

Mints. Assay offices . 

Philadelphia, New York. 

Denver, New Orleans, 

San Francisco. Carson, Nev. 

Boise, Idaho, 

Helena, Mont. 

Dead wood, S. D. 

Seattle, Wash. 

Salt Lake City, Utah. 

Section 19 of the Federal Reserve Act covering the subject of 
reserves is the most important section. The question for bankers 
and financial people to immediately consider is when the second 
paragraph of Section 19 becomes effective. It reads: 

"When the Secretary of the Treasury shall have 
officially announced, in such manner as he may elect, the 
establishment of a Federal reserve bank in any district, 
every subscribing member bank shall establish and main- 
tain reserves as follows": 

Immediately follows the reduction of the required bank re- 
serves, and the transfer of part of the reserves to the regional reserve 
banks. The tremendous changes that take place we show in this 
little table, which every banker should put in his pocketbook: 

RESERVES REQUIRED. 

— Old— 

% m % 

Banks credit cash 

Country 9 6 

City 12£ 12£ 

C Res City 25 

We have printed in full-faced figures the abracadabra acrostic, 
as these are the important figures all financiers may have occasion 
to remember for many years. To assist the memory one need only 
recall that beginning with the country banks which have a final 
optional reserve of 3% (to be kept either in cash, or with the Federal 



New at start 


New Final ■ 


Op- Fed- 


Op- Fed- 


tional Cash eral 


tional Cash eral 


5 5 2 


3 4 5 


6 6 3 


4 5 6 


5 6 7 


5 6 7 



46 THE FEDERAL RESERVE ACT. 

Reserve Bank), the reserves run three, four and five per cent, for 
"optional," "cash" and "Federal" deposits, and likewise three, 
four and five per cent, for "optional," with the country, reserve and 
central reserve banks. 

The central reserve city banks make their change to the five, 
six and seven per cent, basis immediately on inauguration of the 
system. With both the country banks and reserve city banks the 
Federal requirements rise one per cent, at the end of the first year; 
one per cent, in the middle of the second year, and one per cent, at 
the end of the second year. There is no change during the third 
year, but at the end of the third year the cash reserve, which has been 
stationary through the three years, drops one per cent, by transfer 
to the optional column. 

It shows how the country banks, which hold half the national 
bank deposits, and must now maintain 15% in reserves — of which 
6% must be in cash and 9% may be credits with other banks in 
reserve or central reserve cities — must then keep only 12%. Of 
this, 2% of reserve is set up with the Federal Reserve Bank to be 
later increased up to 5%. The cash reserve is 5% and the optional 
reserves, which may consist of credits, are likewise 5%. 

The reserve city banks which must now maintain 25% in reserves 
of which one-half may be credit with banks in central reserve cities, 
must transfer 3% of their deposits to the Federal banks, and, as an 
offset for this, their cash and credit reserve requirements are each 
reduced to 6% at the start; but at the end of two years the Federal 
reserve has been doubled to 6% and at the end of three years the cash 
reserve requirement of the bank is reduced to 5% and the optional 
reserve increased to 4% — but then optional only as between cash at 
home and in the Federal reserve bank. 

The central reserve city banks — New York, Chicago and St. 
Louis — which now have to maintain 25% in cash, not only against 
their individual deposits and other bank reserve deposits, but also 
against the net of the "due to" and "due from" banks where there 
are no reserve relations, must immediately transfer 7% to the Federal 
reserve banks, hold 6% in cash, and hold an optional 5% either in 
cash or with the Federal Reserve Bank. 

There is no further change in the relations of these banks of 
the New York class and they continue as at the start to hold 5, 6, 
and 7 per cent, as "optional," "cash" and "Federal reserve." At 
first they will, of course, hold 11% in cash in their own vaults as the 
Federal banks pay no interest upon reserves, but eventually the 7% 
with the Federal Bank and the 5% optional reserve, or 12% in all, 
may become in toto credit with the Federal Reserve Bank and, 



THE FEDERAL RESERVE ACT. 47 

through the medium of re-discounts, the new federal notes will ulti- 
mately be issued for more than the amount of this reserve. There- 
fore, the 25% cash reserve requirements with the banks of the 
three central reserve cities, while being reduced to only 18%, nomi- 
nally, are actually reduced immediately to 6% cash and in time the 
other 12% is transmuted from cash reserves into credit reserves. 

This table should be studied and memorized. It is the most 
vital thing in finance not only for 1914, but possibly for many years 
thereafter; and not only for the United States but for the whole world. 



XIV 
HOW CONTRACTION MAY BE FORCED. 

It will be recalled that Mr. Glass, one of the reputed authors of 
the currency bill, said in several public addresses, substantially: 
"What do they want? An eminent Chicago banker denounces the 
bill as contraction, and just as eminent a New York banker denounces 
the bill for its inflation. They cannot both be right." 

Yet, strange as it may seem, both results are possible. This 
may be seen by studying the tables below: 

First we repeat the acrostic table from Article XIII: 

RESERVES REQUIRED. 

Old ' — New at start — — New Final — 

% % Op- Fed- Op- Fed- 
Banks credit cash tional Cash eral tional Cash eral 

Country 9 6 5 5 2 3 4 5 

City 12£ 12£ 6 6 3 4 5 6 

Cen Res City . . 25 5 6 7 5 6 7 

How the banks stand at the start in actual cash and credit 
reserves, may next be charted as follows: 

NATIONAL BANK CASH AND CREDIT RESERVES. 

Statement of Oct. 21, 1913. 
(000,000 omitted) 
Net 
Banks: deposits 

7143 Country $3,716 

314 Reserve 1,915 

52 Central Reserve 1,541 

7509 Total 7,172 

♦Deficit. 

In this table the required cash reserves are arrived at by apply- 
ing the percentages of 6, 12£ and 25 for country, reserve city, and 
central reserve city banks, as given in the first table, to the deposits 
of Oct. 21. Thus, the cash reserve required of country banks was 
$223,000,000 and their required credit reserve, assuming that they 
had no cash surplus, was $334,000,000. As a matter of fact, they 
had $47,000,000 surplus cash and $183,000,000surplus credit reserves. 
The required cash and credit reserves of the reserve city banks 
were $239,000,000 each. These banks had $3,000,000 surplus cash, 
but were deficient $17,000,000 in their credit reserves. 

The central reserve city banks were $8,000,000 under their 
required cash reserve; they, of course, had no credit reserves. 



Cash 


Cash 


Credit 


Credit 


reserves 


surplus 


reserves 


surplus 


$223 


$47 


$334 


$183 


239 


3 


222 


*17 


377 


*8 






839 


42 


556 


166 



THE FEDERAL RESERVE ACT. 49 

Xo account is taken of the 5% redemption fund which on the 
signing of the Act was eliminated from bank reserves. On Oct. 21 
these deficits would have been reduced one-half by the 5% reserve 
fund. The central reserve banks then had in it four million dollars, 
and the reserve banks eight million dollars. The country banks 
held the balance, twenty-four millions, in this redemption fund. 

The reserves required to sustain the above "net" deposits of 
seven billions, — which arise, however, from six billions of individual 
deposits, — are 847 millions in cash and 573 millions in credit with 
other banks, as will be seen by transferring the starred deficits to the 
column to the left. 

The sum of these requirements is $1,420,000,000. When the 
new reserves go into effect and also when they are finally in effect 
this required reserve of $1,420,000,000 drops to $1,008,000,000 on 
the percentage of reserves as applied to the above deposits. 

The question will naturally arise, as it did with Mr. Carter 
Glass, how anybody could show that the new reserves meant at any 
time a contraction. 

At the outset no contraction can be forced, for the total cash and 
payments required by the new banking system at the start are less 
than the 847 millions cash tied up under the present system. This 
is shown by the table below, which is arrived at by applying to the 
same deposits used above the percentages given in the acrostic table 
under the heading, "New at Start": 

NEW RESERVE REQUIREMENTS AT THE START. 

On same net deposits (000,000 omitted): 
Home Federal 

cash cash and cr. Optional 

Country banks $185 $7*4 $185 

Reserve banks 115 57 115 

Central reserve banks 92 108 77 

Total 392 239 377 

The country banks and reserve banks have four options — cash, 
in Federal reserve, reserve city or central reserve city banks. 

The central reserve banks have option for their 77 millions only 
between cash at home and deposit with the Federal Reserve. 

This table shows that the actual required cash of member banks 
drops from 847 millions to 392 millions. The total reserves to be 
paid over to the Federal reserve banks are but 239 millions, and of 
the optional reserve all but 77 millions (namely, that held by central 
reserve banks) may be in credits with other reserve city banks. 
Therefore, at the start, even assuming that the Federal Reserve 
Bank receives nothing but cash, the total amount of actual cash 



50 THE FEDERAL RESERVE ACT. 

holdings which can he forced under the new Act is 392 millions plus 
239 millions plus 77 millions, or 708 millions, against 847 millions 
now tied up. It may be much less. Clearly, therefore, there is no 
contraction at the commencement of the new system. The possible 
expansions will be treated in later articles. 

After 36 months all optional reserves must be held either in 
Federal Reserve banks or as cash in vault. Here contraction may 
be forced . 

While there is only 889 million cash in all the national banks 
of the country, the new Federal Reserve Act calls (on the Oct. 21st 
basis) for a reserve of §1,008,000,000, all of which may be cash 
eventually at the will of the Federal Reserve Board. 

In other words, while the member bank cash requirements 
are reduced from 847 millions to 392 millions, it is within the power 
of the Federal Reserve Board to make the remaining 616 millions 
ultimately cash, should the Board elect to hold ultimately nothing 
but cash in the reserve banks. 

All this is shown by the table below, arrived at by applying to 
the same deposits above used the "final" percentages given in the 
acrostic table: 

FINAL RESERVE REQUIREMENTS. 

On same net deposits (000,000 omitted) : 

Home Federal Optional cash 

cash credit or Federal cr. 

Country Banks $148 S185 $111 

Reserve Banks 96 115 76 

Central Reserve Banks 92 108 77 

Total 336 408 264 

Sum of the three reserves $1,008,000,000. 

Here then is a possible increase in required cash from $847- 
000,000 to $1,008,000,000, or by $161,000,000. While it may well 
be doubted whether any such amount of cash will actually be im- 
pounded, nevertheless it is within the power of the Federal reserve 
banks to bring about such a contraction, should they elect ultimately 
to hold nothing but cash in their own reserves. 

In view of the fact that 108 millions in gold may also in three 
years be paid in by the member banks to constitute the capital of the 
reserve banks, it is only theoretical to hold to the possibility of the 
impounding by the reserve banks of 269 millions in gold and lawful 
money. The banks and the Federal Board would have to conspire 
to this end. 

However, the possibility of actual contraction under the new 
system is one which no banker can afford to ignore. 



XV 

EXPANSION BY MEMBER BANKS. 

The opportunity for expansion by member banks because of 
reduction in the required reserves was pointed out in a previous 
article. It wll now be shown in detail how this expansion may come 
about. 

It has been generally figured that the country banks and the 
reserve city banks would draw heavily upon the central reserve citi- 
banks for their initial payments in transfer of deposit account to the 
Federal reserve banks. 

This assumption does not seem to be warranted by the figures 
given in Article XIV, and for convenience reproduced here. 

NEW RESERVE REQUIREMENTS AT THE START. 

On net deposits of Oct. 21, 1913: 

(000,000 omitted.) 

Home Federal 
cash cash and cr. Optional 

Country banks $185 $74 $185 

Reserve banks 115 57 115 

Central reserve banks 92 108 77 

Total 392 239 377 

The country banks, therefore, which had cash, October 21, of 
270 millions can pay in their 74 million dollars in cash into the 
Federal reserve banks and still have 11 millions surplus cash at 
home. Should they desire, however (and considering the number 
of banks they should certainly desire), to keep about the same 
excess cash they had Oct. 21, or $47,000,000, they have only to use 
in making payments to the Federal reserve banks 36 millions of their 
commercial notes. 

This shows that the country banks, concerning which so much 
has been said, can by the use of 36 millions of commercial re-discounts 
make their initial payments to the Federal banks, have the same sur- 
plus cash at home as last October, and then hold 517 millions of 
credit reserves and credit surplus with other banks to meet the 185 
millions optional reserves, leaving a surplus of 332 millions. 

Should they elect to make no re-discounts with the Federal 
banks they could keep the same surplus cash at home and draw 



THE FEDERAL RESERVE ACT. 

only 36 millions of their 517 millions reserves and surpluses with 
other banks. 

Evidently the country banks do not need to make any primary 
disturbance in the money market in their initial payments to Un- 
reserve banks. Instead, with their large surplus credits, they are in 
a position to expand loans heavily. 

The banks of 47 reserve cities have their cash requirements 
reduced in the beginning from 230 millions to 115 millions, or by 124 
millions. But they are required to pay at the start, to the Federal 
reserve banks 57 million dollars. This leaves them with 67 millions 
of surplus cash or 95 millions should they elect, as they may, to pay 
in re-discounts one-half the required 57 millions to the Federal banks. 

In this matter the Federal Board has no choice, for the Reserve 
Bank is under control of the member banks until there is an applica- 
tion for the new Federal notes. The law reads that the Federal 
reserve bank "may receive" "one-half of each instalment" in 
"eligible paper." But the Federal Reserve Board may raise the 
rate of discount and thereby induce cash payments. 

The Federal Board should welcome the paying of half the 
instalments in commercial bills, for these give the new banks some 
earnings at the start and later the Federal Board some control over 
the money market. By raising the rate of discount the Federal 
Board may drive the makers of maturing paper into the outside 
discount market. 

These reserve city banks may make payments of first instal- 
ments as above noted without calling upon their credit reserves whose 
requirements are reduced from 240 millions to 115 millions, thus giv- 
ing a basis of 125 millions for some credit expansion. 

The banks of the three central reserve cities have their reserve 
requirements on the basis of the figures of last October reduced from 
385 millions to 277 millions, a reduction of 108 million. They have 
no credits with other banks, nor are they, like the country or reserve 
city banks, permitted to count any moneys they have with other 
banks as in any way reserves. All their reserves must therefore be 
in cash, or with the Federal reserve banks. They may, however, 
mako payment of one-half their 108 millions to the Federal banks in 
re-Jiscounted paper. 

To sum up, therefore, on the initial payments at the inaugura- 
tion of the new banking system, the cash reserve requirements of 847 
millions fall to 392 millions, a drop of 455 millions. But from this 
latter sum must be deducted 119 millions cash which must be paid 
into the reserve banks and so much of the other half, 119 millions, 
as the banks do not elect to offset with commercial paper. 



THE FEDERAL RESERVE ACT. 53 

Initially also there should be deducted 77 millions which the 
central reserve city banks must hold within their own vaults or pay 
over to the reserve banks. 

This makes in cash requirements a net reduction of 259 millions 
which becomes immediately the basis for credit expansion. It 
can be still further added to by the central reserve banks passing all 
their optional 77 millions over to the Federal reserve banks and as 
fast as checks are drawn against it making good their reserves by 
re-discounts, the proceeds of which fill up the reserves. 

It is provided in the Act that the first reserve obligation of a 
member is to hold its own cash. It is next provided that it must 
maintain reserves with the Federal reserve banks. It is also specifi- 
cally provided that the reserve with the Federal bank is a working 
reserve and that the entire sum may be used in meeting checks or 
drafts. 

Called upon to make good its deficiency with the Federal bank, 
the member bank responds by offering paper for re-discount to make 
its credit reserves. If currency is not wanted the only control the 
Federal Board has is to raise the rate and thereby permit the member 
banks to earn with re-discounts the dividends on their own shares. 

Suppose, however, all the banks elect at the start to pay in 
and hold their reserves wholly in cash, with no re-discounts. This 
would amount to 631 millions, to which must be added the 77 mil- 
lions of the central reserve city banks, which are optional only as 
between cash and the reserve bank. There is then a net reduction 
of 139 millions in cash reserve requirements. This permits, event- 
ually, at least one billion of credit expansion before the Federal 
Bank has taken in a commercial note, or issued a Federal note, or 
done anything but lock up 239 million dollars. 

Of course, these figures take no account of the first 54 millions 
paid in on capital account which can be taken care of from reduced 
credit reserves which have now come down to just 300 million for 
the country and reserve city banks, where before 573 millions were 
required and 740 millions actually held. 

The surplus here of 440 millions in bank credits might release 
sufficient cash to provide this payment of 54 millions; but if it were 
taken from the surplus cash reserves of the banks there would still 
remain 85 millions surplus cash after every obligation to the Federal 
government had been met in cash. And this 85 millions could be 
the basis of a 750 million dollar credit expansion at the outset. Be- 
fore the full payments are made to the reserve banks the re-discount 
program must be set up and a fair amount of credit expansion per- 
mitted. 



54 THE FEDERAL RESERVE ACT. 

The expansion that can follow when rising markets, and rising 
demands for labor and material, have forced the issue of Federal 
notes to prevent any contraction of the expanded base, must be con- 
sidered later. Let it be here said that there would appear to !><■ 
no initial necessity for the issue of any Federal reserve notes. 

It can be assumed right from the start that no bank will pay a 
dollar into the Federal reserve banks beyond its obligations so long, 
as its correspondents will pay anything for the use of money. 

Indeed, there will be a tendency on the part of the member 
banks to "nig" on their reserves with Federal Reserve banks pro- 
vided the Federal bank pays no interest; for any deficiency in re- 
serve comes about by the checks other people draw upon member 
banks, without the bank's primary knowledge. 

Should the Federal banks some time in the future desire that 
the member banks keep their reserves full up, the Federal Reserve 
Board might well pay 2% on surpluses over the legal requirements 
and charge 2£% or 3% on deficiencies. This would put the laboring 
oar upon the member banks to keep up their reserves; otherwise 
the Federal reserve banks will have to be not only bookkeepers but 
schoolmasters, daily reminding the member banks of their de- 
ficiencies. 

There is no patriotism in an organized bank until its own 
existence is in some way jeopardized. And be it ever remembered 
that the national banks under the new Act will play for their own 
profit in these reserves for dollars and cents in full confidence that 
they are released from reserve obligations in the letter of the law. 
The maintenance of reserves not only for elasticity but for all 
emergency has been undertaken by the Federal government and its 
new banking system. 

Just as the national banks at present take out circulation when 
money is least needed because they can get a small profit thereby, 
so will they pass out all their reserve moneys, to the full limit, com- 
peting with each other and lowering the rate of interest until all their 
moneys are earning "cent per cent." 

The government at Washington will ultimately learn, from its 
own children in the banking field, the result of unrestrained price 
competition. 



XVI 



THE NEED FOR EXPANSION. 



Before taking up the possibility of future expansion, or inflation, 
in all its forms, from the new bank act, it is necessary to carefullycon- 
sider the business of the country in relation to its money and credit 
requirements. 

It must first be noted that the United States has expanded its 
gold money base more rapidly and to greater proportions than any 
other nation. We now hold almost one-quarter of the world's 
gold money and since 1900 have increased our gold base by a larger 
percentage than any other leading nation. Nevertheless, on the 
figures now to be presented it would appear that both in 1907 and in 
1913 we had reached the limit of credit expansion upon our metallic 
base. 

Here are the figures of the money in the country, both in total 
sum and per capita of population, also the amount of gold in the 
country and the amount of money in the banks upon which credit is 
built up: 

MONEY IN UNITED STATES. 

(00,000 omitted, except in "per capita.") 

Total In Total in 

money treas. Total Total Per circula- Per Total 

in as in with cap- tioninc. cap- gold in 

June 30 U.S. assets banks people ita banks ita U.S. 

1913 3,720.0 356.3 1,552.3 1,811.4 18.61 3,363.7 34.56 1,868.8 

1912 3,648.8 364.3 1,563.8 1,720.7 17.98 3,284.5 34.34 1,818.2 

1911 3,555.9 341.9 1,545.5 1,668.5 17.75 3,214.0 34.20 1,753.2 

1910 3,419.5 317.2 1,414.6 1,687.7 18.68 3,102.3 34.33 1,G36.0 

1909 3,406.3 300.1 1,444.3 1,661.9 18.68 3,106.2 34.93 1,642.0 

1908 3,378.8 340.8 1,362.9 1,675.1 19.15 3,038.0 34.72 1,618.1 

1907 3,115.6 342.6 1,106.5 1,666.5 19.36 2,773.0 32.22 *1,466.4 

1906 3,069.9 333.3 1,010.7 1,725.9 20.39 2,736.6 32.32 1,475.7 

1905 2,883.1 295.2 987.8 1,600.1 19.22 2,587.9 31.08 1,357.6 

1904 2,803.5 284.3 982.9 1,536.3 18.77 2,519.2 30.77 1,327.6 

1903 2,684.7 317.0 848.0 1,519.7 18.88 2,367.7 29.42 1,248.7 

1902 2,563.2 313.9 837.9 1,411.4 17.90 2,249.3 28.43 1,192.6 

1901 2,483.1 307.8 794.9 1,380.4 17.75 2,175.3 27.98 1,124.7 

*In 1907 the director of the mint reduced his estimate of stock of gold coin 
in country by 135 millions. 



50 



THE FEDERAL RESERVE ACT. 



money in united states. — Concluded. 

(00,000 omitted, except in "per capita.") 

Total In Total in 

money treas. Total Total Per circula- 

in as in with cap- tioninc, 

June 30 U.S. assets banks people ita banks 

1900 2,339.7 284.6 749.9 1,305.2 17.11 2,055.1 

1899 2,190.0 286.0 723.2 1,180.8 15.51 1,904.0 

1898 2,073.5 235.7 687.7 1,150.1 15.43 1,837.8 

1897 1,906.7 265.7 628.2 1,012.8 13.87 1,641.0 

1896 1,799.9 293.5 531.8 974.6 13.65 1,506.4 

1895 1,819.3 217.4 631.1 970.8 13.89 1,601.9 

1894 1,805.5 144.2 688.9 972.4 14.21 1,661.3 

1893 1,7388 142.1 515.9 1,080.8 16.14 1,596.7 

1892 1,752.2 150.9 586.4 1,014.9 15.50 1,601.3 



Per 


Total 


cap- 


gold in 


ita 


U.S. 


26.93 


1,036.0 


25.62 


975.4 


25.19 


863.8 


22.92 


697.2 


21.44 


600.1 


23.24 


636.2 


24.56 


629.1 


24.06 


592.1 


24.60 


664.3 



The above table should be carefully studied. It shows that 
in 20 years our stock of gold has increased threefold, our total stock 
of money has slightly more than doubled but that our Treasury 
money has been increased by 130%. Our money in bank has been 
multiplied threefold, and while the Treasury figures show money in 
circulation and in bank has increased from $24 to $34 per capita, 
the real money in the pockets of the people has increased per capita 
since 1893 by but 15%. 

In this entire period there has been an expansion in wages of 
15% which took place mostly before 1907. From 1907 to 1911 there 
was no expansion in wages; the money in bank was increased by 
40%. These were the financial indexes of the time as anybody 
may recall. Many economic and financial deductions can be made 
from this table, but the present purpose here is only to show their 
relation to the new bank act and that banking expansion and the 
growth of the United States has caused "industry" expansion com- 
bined with wage and commodity expansion to periodically bump up 
against the fixity of reserves in the banks. 

Reverting to figures of table in Article IV, it will be noted that 
$6,650,000,000 of deposits and a like amount of loans are sustained 
in state banks and trust companies with $531,000,000 of money. 
In the national banking system $6,050,000,000 of individual deposits 
are sustained by $890,000,000 of money. 

The state laws require less reserves and a dollar of money will 
here sustain $12.00 of credit. But in the national banking system 
a dollar of money sustains less than $7 in deposits. 

The tables below will now show how for a series of years, as 



THE FEDERAL RESERVE ACT. 



57 



given in the five reports annually on the Comptroller's call, the 
national banks have been expanding credits. 

It should be noted in this connection that Comptroller's calls 
singularly avoid crucial dates and during the panic of 1907 were 
omitted. But the tendency in expansion and the bumping up against 
fixed reserves, as described in previous articles, will be seen mapped 
out in these tables. 

That we had no unpleasant experience in 1913 and no sharp 
money rates, contracting values and dangerously setting back on 
the dial plate the wealth of any worker who owed money, was due 
to the firm hand at Washington and the general desire of banks "to 
be good" under threat of government inquiry. 

Notwithstanding the United States Treasury had $46,477,439 
on deposit with national banks Jan. 1, 1913, and $68,348,490 July 
1, 1913, Secretary McAdoo steadily increased the deposits of the 
banks in the South and West during the crop-moving period so that 
the United States Treasury deposits reached a maximum of $94,- 
448,245 on Nov. 24. 

Below are shown the aggregate counted reserves of national 
banks for the five reports made during each of the last nine years, 
divided as to actual cash holdings and counted reserves with agents; 
and also the percentage of reserve. It will be seen that cash reserves 
show a falling off about the fall of every year, while there is generally 
a marked increase at the beginning of each year: 



Date Cash 

Jan. 13,1914 $981,919,420 

Oct. 21, 1913 889,632,454 

Aug. 9, 1913 899,169,374 

June 4, 1913 913,982,640 

April 4, 1913 887,283,735 

Feb. 4, 1913 933,417,231 

Nov. 26, 1912 859,098,737 

Sept. 4, 1912 895,951,094 

June 14, 1912 945,202,895 

April 18, 1912 931,689,162 

Feb. 20, 1912 950,497,398 

Dec. 5, 1911 862,794,196 

Sept. 1, 1911 895,475,406 

June 7, 1911 946,331,109 

Mar. 7, 1911 908,036,627 

Jan. 7, 1911 836,267,359 



Counted Res. 


% Res. to 


with Agents 


Net dep'ts 


$553,459,761 


21.74 


548,046,341 


20.54 


535,721,081 


20.72 


543,488,809 


20.95 


552,493,927 


20.44 


552,965,636 


20.91 


536,690,544 


20.35 


536,760,433 


20.69 


525,459,880 


21.35 


524,020,262 


21.30 


522,431,546 


21.44 


507,103,670 


21.05 


498,218,584 


21.36 


498,166,813 


22.10 


493,149,279 


21.67 


471,291,332 


21.40 



58 



THE FEDERAL RESERVE ACT. 



Date Cash 

Nov. 10, 1910 S16,070,660 

Sept. 1, 1910 851,685,037 

June 30, 1910 820,772,892 

Mar. 29, 1910 834,895,586 

Jan. 31, 1910 833,078,869 

Nov. 16, 1909 804,860,734 

Sept. 1, 1909 854,091,857 

June 23, 1909 885,915,771 

April 28, 1909 878,557,008 

Feb. 5, 1909 860,116,882 

Nov. 27, 1908 ...... 844,759,519 

Sept. 23, 1908 868,424,070 

July 15, 1908 849,018,749 

Mar. 14, 1908 861,326,450 

Feb. 14, 1908 788,395,576 

Dec. 3, 1907 660,784,736 

Aug. 22, 1907 701,623,533 

May 20, 1907 691,591,148 

Mar. 22, 1907 ...... 656,220,551 

Jan. 26, 1907 695,503,522 

Nov. 12, 1906 634,550,158 

Sept. 4, 1906 626,012,411 

June 18, 1906 651,233,604 

April 6, 1906 620,494,868 

Jan. 29, 1906 668,303,290 

Nov. 9, 1905 622,092,079 

Aug. 25, 1905 665,553,300 

May 29, 1905 649,265,050 

Mar. 14, 1905 641,153,633 

Jan. 11, 1905 669,971,553 



Counted Res. 


% Res. to 


with Agents 


Net dep'ts 


465,101,183 


21.18 


462,907,440 


21.57 


461,230,483 


21.22 


473,070,284 


21.21 


457,955,248 


21.47 


450,918,347 


21.31 


449,509,685 


21.67 


441,332,929 


22.37 


437,115,702 


22.38 


429,013,432 


22.36 


414,180,709 


22.32 


409,020,320 


22.97 


387,701,205 


23.19 


376,073,437 


23.94 


363,368,396 


23.47 


356,520,434 


21.31 


392,429,183 


21.33 


390,147,862 


21.22 


383,195,660 


20.74 


387,375,750 


21.53 


372,481,873 


20.80 


368,628,517 


20.70 


356,949,920 


21.44 


354,816,015 


21.03 


350,712,508 


21.82 


342,154,047 


21.17 


338,448,685 


21.69 


328,021,225 


21.68 


325,098,395 


21.54 


317,085,907 


22.82 



Practically speaking, the cash held in the banks does not vary 
very much, year in and year out. There is an increase over a series 
of years, due in large measure to the production of gold. It has been 
safe to speak of the actual cash in the national banks as about $900,- 
000,000 the last few years. 

Where the national banks have increased their reserve holdings 
to a more material extent is in credit balances with reserve agents. 

In the following table are set forth the individual deposits, 
the aggregate balances with approved reserve agents, the percentage 



THE FEDERAL RESERVE ACT. 



59 



of total reserve to "net deposits," and the percentage of actual 
money held to individual deposits for all the Comptroller's reports 
since the beginning of 1905: 



Date 



Jan. 13 

Oct. 21 

Aug. ' 9 

June 4 

April 4 

Feb. 4 

Nov. 26 

Sept. 4 

June 14 

April 18 

Feb. 20 
Dec. 
Sept 
June 
Mar. 

Jan. 7 

Nov. 10 

Sept. 1 

June 30 

Mar. 29 

Jan. 31 

Nov. 16 

Sept. 1 

June 23 

April 28 

Feb. 5 

Mar. 27 

Sept. 23 

July 15 

May 14 

Feb. 14 

Dec. 3 

Aug. 22 

May 20 

Mar. 22 



1914 
1913 
1913 
1913 
1913 
1913 
1912 
1912 
1912 
1912 
1912 
1911 
1911 
1911 
1911 
1911 
1910 
1910 
1910 
1910 
1910 
1909 
1909 
1909 
1909 
1909 
1908 
1908 
1908 
1908 
1908 
1907 
1907 
1907 
1907 



Individ, dep. 

$6,072,064,752 
.6,051,689,087 
.5,761,338,731 
.5,953,461,551 
.5,968,787,045 
.5,985,432,295 
.5,944,561,069 
.5,891,670,007 
.5,825,461,163 
.5,712,051,088 
.5,630,559,231 
.5,536,042,281 
.5,489,995,011 
,5,477,991,156 
.5,304,624,091 
.5,113,221,817 
.5,304,788,306 
.5,145,658,367 
.5,287,216,312 
.5,227,851,556 
5,190,835,219 
5,120,442,963 
.5,009,893,079 
.4,898,576,696 
.4,826,060,384 
.4,699,682,942 
.4,720,284,640 
.4,548,135,165 
.4,374,551,208 
.4,312,656,789 
.4,105,814,418 
.4,176,873,717 
.4,319,035,402 
.4,322,880,141 
.4,269,511,629 



Total % of all % cash 

cred. bal. res. to to indiv. 

with agts. net dep. dep. 



$802,786,844 
791,671,167 
769,213,605 
762,176,994 
808,364,504 
850,478,400 
786,190,805 
812,152,402 
778,908,242 
809,939,983 
859,562,144 
751,993,136 
744,614,305 
765,686,132 
814,270,800 
717,463,231 
686,468,726 
688,715,945 
660,352,109 
727,762,703 
707,434,039 
689,513,982 
719,351,249 
720,198,213 
727,012,348 
750,597,593 
701,705,151 
711,948,690 
640,387,918 
612,969,288 
598,536,934 
523,828,151 
614,496,352 
628,784,065 
624,972,079 



25.19 
23.94 
24.01 
24.02 
23.99 
24.99 
23.89 
24.57 
24.94 
25.39 
26.24 
24.72 
25.05 
26.10 
26.52 
25.33 
24.75 
25.19 
24.44 
25.24 
25.52 
25.26 
26.05 
26.96 
27.20 
27.82 
27.30 
28.29 
27.81 
28.41 
28.14 
24.72 
25.56 
25.79 
25.45 



16.17 
14.70 
15.61 
15.35 
14.88 
15.60 
14.45 
15.21 
16.23 
16.31 
16.88 
15.57 
16.31 
17.28 
17.12 
16.35 
15.38 
16.55 
15.52 
15.97 
16.05 
15.72 
17.00 
18.09 
18.20 
15.09 
17.90 
19.09 
19.41 
19.97 
19.20 
15.82 
16.25 
16.00 
15.37 



GO 



THE FEDERAL RESERVE ACT. 















%of 










Total 


% of all 


money 










cred . bal . 


res. to 


held to 




Date 


Individ, dep. 


with agts. 


net dep. 


ind. dep. 


Jan 


26 


1907 


.$4,115,650,294 


$662,435,487 


26.87 


16.91 


Mar. 


12, 


1906 


.4,289,773,899 


605,237,176 


25.48 


14.80 


Sept. 


4, 


1906 


.4,199,938,310 


616,147,683 


25.72 


14.91 


June 


18, 


1906 


.4,055,873,636 


587,668,626 


26.23 


13.60 


April 


6, 


1906 


.3,978,467,885 


588,639,984 


25.95 


15.60 


Jan. 


26, 


1906 


.4,088,420,135 


598,697,066 


27.00 


16.34 


Nov. 


9, 


1905 


.3,989,522,834 


569,121,818 


26.04 


16.60 


Aug. 


25, 


1905 


.3,820,681,713 


605,464,479 


27.33 


17.42 


May 


29, 


1905 


.3,783,658,494 


562,495,160 


26.76 


17.16 


Mar. 


14, 


1905 


.3,777,474,006 


594,094,119 


27.40 


16.97 


Jan. 


11, 


1905 


.3,612,499,598 


542,193,651 


27.92 


18.55 



Percentage of total reserve in this table is the ratio of total 
credit balances here given, plus total cash given in previous table, 
plus redemption fund, to total "net deposits" which on Oct. 21 
were $7,172,000,000. 

It would appear from these tables that there was necessity for 
a form of relief to the money market other than that of Treasury 
deposits. 

The argument that Treasury money should be deposited in 
banks, and any emergency in currency and credit left entirely for 
treatment with the banks, private, state and national, will not hold, 
politically, under our American system. 

If the government has an obligation to stimulate and protect 
business by protective tariff — and both political parties have 
agreed to this — also to regulate transportation charges that injustice 
may not be done, it certainly has an obligation which it cannot dele- 
gate to any private or incorporated bank to protect the money rate 
from stifling commerce, enterprise or industry. 

It is just as much a function of government to protect the inter- 
change of commodities among the people by safe and sound financial 
transportation as it is by any other transportation. 

In some years many more men are robbed of their goods by 
irregular money markets than there are sufferers by fire, flood and 
larceny. 

The world has said that there was no insurance against financial 
panics. The United States is going to attempt to demonstrate that 
there is. Let it be remembered in this connection that modern 



THE FEDERAL RESERVE ACT. 61 

banking is not yet 50 years old. In each of the three decades preced- 
ing 1870 the Bank of England by suspension of the Bank act of 1844 
assumed, if it did not exercise, the power to suspend specie payments. 
Since 1870 all the disgraces in finance have been labeled American. 

It took the disgraceful American panic of 1907, upsetting the 
foundations of the civilized world, to emphasize to America how in- 
adequate and how dangerous was her banking and currency system. 

Only a new party in power having everything to gain and noth- 
ing to lose would have undertaken the tasks of revision, in one year, 
of tariff, currency and business laws. 



XVII 

AN AMERICAN SYSTEM AND NEW DEFINITIONS DE- 
MANDED. 

The irresistible expansive power of the United States, both in 
contact and example, is something with which the whole world has 
had to reckon now for a hundred years. "Les Americans; they do 
arreeve," exclaimed Sara Bernhardt. How they arrive, politically, 
financially or otherwise, they never seem to know or care. But they 
do get there and they know it. They have grown in that abounding 
self-confidence that effectively declares that individual faith removes 
all individual mountains. The Revolutionary Army fought with- 
out a constitution, and the colonies failed in their first attempt to 
make one. When, however, it was seen that the deficiency was in 
the power to tax, they made a new constitution that needed no tax 
amendment for more than a hundred years. Taxing incomes had 
not been dreamed of by our Revolutionary forefathers. Full con- 
fidence is growing in the new currency act that if it is found faulty 
anywhere we may easily amend it. 

The deficiency in our banking system was in the extravagance 
of our fixed reserves, our lack of an outside, or investor's, discount 
and acceptance market, and thirdly our lack of centralized control 
over rates and reserves. 

When we have sufficiently demonstrated our independence of 
all foreign financial advices and examples and also our ability to 
be the most extravagant nation in the world as respects bank re- 
serves and gold hoardings, and panic penalties, we suddenly reform 
everything altogether. 

Under the present bill we are to practically abolish any fixed 
reserve. All national bank reserves are cut to mere "till money" 
and may be suspended. The real reserves are set up with the new 
federal reserve banks to be later transmuted into book credits, 
for exchange and discount purposes, and to be eventually, as the 
country expands, covered many times over with the new form of 
currency. And here again all reserves may be suspended in time of 
need. 

There will be centralized control over some reserves and over 
reserve rates and discounts. Acceptance markets and branch 
banks may be set up nationally and internationally. With reduced 



THE FEDERAL RESERVE ACT. 63 

cost for check collections and ability to interchange government 
bonds, government paper and gold, or to purchase the latter, we 
have started to remedy all our deficiencies in finance at one sweep 
and have tossed the whole into a Federal reserve board, yet to be 
named. We have been slow in preparing for the change but in no 
country in the world could so sweeping a change be so suddenly made 
and so generally accepted . 

We Americans fought without a Constitution but under a 
Declaration of Independence. We continue to fight under the 
banner of our independence rather than under the restraints of our 
Constitution. Under that banner we absorb a million raw recruits 
a year and carry forward socially and politically just a bit of dare- 
devil lawlessness that resists the police, cusses the courts, condemns 
the old way and seeks the new. 

We use blood and muscle and vocal power most extravagantly; 
compete with the beaver in cutting the forests; persist in plowing 
two acres where one would raise the same crop under proper cultiva- 
tion, and delight in pocket bill rolls and the jingle of pocket silver and 
gold. 

This is the progressive, arriving American spirit that laughs at 
schoolmasters, judges, banks, economists and property accumulators; 
will scatter gold in the street if it elects, or make a minimum wage of 
$5 per day for office boy and scrub woman, just as a social experiment 
and in defiance to all precedent. 

This is Uncle Sam with high hat and bursting trousers that 
have to be strapped under his boots to keep them on. He will 
polish his hat and change his financial suit when he "durn pleases," 
and when he does he is perfectly willing all the world should take 
notice. He would not be Uncle Sam if he did not "set the pace" 
when he starts for a new fashion. 

People who think that America is going to have a European 
financial system may be reckoning without their host. 

Those who think there is going to be immediately established 
an international discount market attracting foreign capital will 
probably have occasion to revise their plans. The greatest free 
trade market in the world is within the 48 American empires now 
called states. The greatest investment discount market in the 
world could be made right here and an inter-state note market may 
yet be set up under our new banking system and rival if not surpass 
any European discount market, before European investors can be 
attracted into an American bill market. 

Europe knows very little of our quick system of communica- 
tion, our jingling telephones and flashing public press or of our high 



«,1 THE FEDERAL RESERVE ACT. 

beating financial pulses. She is still as timid concerning the size 
of Brother Jonathan and his ability to "eat up all creation" as she 
is timorous of the Russian bear that still makes Europe nervous as 
he drops a hundred millions of reserves here and there over Europe. 



XVIII 
COMMERCIAL PAPER. 

While we are borrowing our terms and formulas in the new Re- 
serve Act from Europe it must be distinctly understood that these 
can be made applicable only under new rules from the Reserve Board. 
We have no such bill markets, or acceptance markets, as Europe 
possesses. Commercial paper by the European and by the older 
American standards was a note given for goods and so timed that a 
sale of the goods would meet the note. Acceptances are drafts, 
sometimes with collateral or bills of lading attached and accepted by 
the banker for payment 60 or 90 days hence. Such acceptances sell 
in the market upon the banker's name and credit and millions are in- 
vested in Europe in this form of security. 

The American higher money rates causing discounts for cash 
have largely driven out the older forms of commercial paper. A 
buyer being offered 2% or 3% discount for cash, instead of 60 or 
90 days' credit, immediately figures the rate of interest and rushes to 
his bank, if need be, to get the cash and the advantage of such a 
high interest rate. 

The result is that today in the United States commercial paper 
is largely bank borrowing upon the name and credit of a single com- 
mercial house. 

Modern economists are declaring that the American system 
of commercial borrowings is superior to the European. In Europe 
it is the name of the banker-merchant, Barings, Kleinwort, etc., 
that carries the paper and gets the low rate. In this country it is 
the general credit of the goods themselves and the merchant or manu- 
facturer who is handling them. 

It is not yet clear that the European system is to prevail in this 
country over the American system in this 20th century era. 

The Federal Reserve Board must rule that borrowings for 
merchandise purposes that are good at the member bank must 
be accepted as commercial paper in re-discount at the Reserve Bank. 

The first decision upon this matter may arise when the mem- 
ber banks offer half their instalment payments to the reserve banks 
in the form of "eligible paper" as noted in Section 19, but "a 



66 THE FEDERAL RESERVE ACT. 

described in Section 14 properly endorsed and acceptable to the said 
reserve bank." Section 14 reads: 

"Any federal reserve bank may, under rules and regula- 
tions prescribed by the Federal Reserve Board, purchase 
and sell in the open market, at home or abroad, either from 
or to domestic or foreign banks, firms, corporations, or in- 
dividuals, cable transfers and bankers' acceptances and bills 
of exchange of the kinds and maturities by this Act made 
eligible for re-discount, with or without the indorsement of a 
member bank." 

This section is the result of agitation now for many years by 
Mr. Paul M. Warburg, and it covers fully foreign bills of exchange. 
"Bankers' acceptances and bills of exchanges" are known 
abroad, but acceptances and bills of exchange are not known as be- 
tween bankers of this country. 

Right at the start the Act may have to be amended to make the 
eligible paper for instalment payments that likewise described in 
Section 13 as "notes, drafts, and bills of exchange, arising out of 
actual commercial transactions" or "drawn for agricultural, indus- 
trial or commercial purposes," "the Federal Reserve Board to have 
the right to determine or define the character of the paper thus eligible 
for discount, within the meaning of this Act." 

It will thus be seen that the Act may need amendment unless 
foreign acceptances and bills of exchange are to have the right of 
entry for the first 200 millions into the Federal Reserve Banks. 

Of course, the wording of this Act can be circumvented by 
member banks re-discounting under Section 13 and then making 
transfer of credit with the reserve bank for their instalment pay- 
ments. 

It would seem, however, as though the Act should be imme- 
diately amended by making Section 19 read: "Eligible paper as 
described in Sections 13 and 14" instead of only "as described in 
Section 14."* 

Before "acceptance" and "bill" markets can be set up here, 
under the new currency act America is going into an industrial ex- 
pansion such as has never before been known. 

Now industrial expansion has very little relation to that which 
makes so-called commercial paper which, in the text of the letter, 
appears to be the keynote of the bank act but which can have little 
relation to the bank act until there is expansion in prices of labor 



* Note. Since this was written Section 19 has been amended to read 
"Eligible paper as described in Section 13." 



THE FEDERAL RESERVE ACT. 67 

or commodities or there has been an over-investment in the field of 
constructive industry. It sometimes appears as though the greatest 
good to the greatest number in the world arose from popular fiction, 
fabrication or misinformation. What the theologians call "apparent 
truth" is sometimes more potential than real truth and in certain 
ways it may accomplish great good. 

Our brothers of the South may have thought Uncle Tom's 
Cabin a very useful book in making white owners of black men more 
prudent and careful. They rested their faith in the Constitution, 
but fiction was more powerful. 

That there was no demand for more currency or facilities for 
expanded credit to move the commerce of the United States, and 
that all such demand was a political fiction and never a financial 
reality will be shown in the next article. 



XIX 

CONSTRUCTION NEEDS. 

The cry that has gone up from Congress has been, "Unshackle 
business." "Away with stocks and bonds and Wall Street." "Give 
hogs and hens, beef on hoof, cotton in bales, and wheat in barn, the 
right of way to market." "We will build a bank act that will give 
commerce right of way to bring raw products from farm to factory 
and family." 

Let us see where commerce stands in relation to raw products 
from farm to factory or family. 

The cotton crop of the United States is estimated at a value of 
$975,000,000. Summon all of the money of the world to assist in 
its financing to market and you could not employ $200,000,000 in 
sixty or ninety day bills, for the cotton grower has now some money 
himself. The wheat crop requires less money. The corn crop and 
the grass crops although worth more also take less money as they 
move largely in pork and beef. No great amount of money in credit 
form of commercial paper is required to move iron or coal. The 
Reading Railroad and the Steel Corporation are not makers of com- 
mercial paper. The real financial requirements of commerce are 
largely away from the farm and after raw materials have been multi- 
plied in value by added labor. 

The Washington authorities have been trying to get some 
estimates of the amount of commercial paper in the banks. For 
the purpose of these articles leading bankers of the country have 
been likewise canvassed for estimates that would be valuable in 
revision of the government tables. The Comptroller of the Currency 
in his annual report issued in December presents a table on page 
five showing that on June 4, 1913, of the $6,143,000,000 loans in the 
national banks 33%, or $2,032,000,000, were time paper with two or 
more individual or firm names. Single name time paper without 
other security was 20%, or $1,261,000,000. There were demand 
loans of $603,000,000, with one or more individual names. There 
were time and demand loans on stocks and bonds, or mortgages, or 
other real estate security amounting to $2,245,000,000, or 36%. 
If the demand loans are divided as between commercial and collateral 
loans, the commercial loans would stand at 58%, or $3,600,000,000. 

The best estimates that we can get privately of bankers is that 



THE FEDERAL RESERVE ACT. 69 

the real commercial loans in the national banks do not exceed three 
billions, or one-half the loan account. 

While the paper appears in the form of commercial loans a 
considerable part is for fixed forms of property and for as distinctively 
industrial construction expansion as are stocks and bonds. And 
why should it not be? 

A merchant with sufficient capital to do his own banking may 
have several hundred thousand dollars cash in the bank, owe no 
money and have a million dollars in accounts on his books, or notes 
in his box representing commercial loans due him. His business 
expands and he desires to put a half million or a million into a new 
factory. Will he issue stocks or bonds or make any permanent bor- 
rowing for this? Certainly not. He notifies his bank he will want 
a half million or more money covering certain months. The bank's 
response is, of course, that he can have all the money he wants and 
give any kind of a note on time or demand. His cash balance is 
worthy of this credit. His borrowing is, therefore, not necessary 
commercial borrowing, but the commercial borrowing is forced by 
his construction. 

The state banks and trust companies carry far less commercial 
paper than the national banks. On page 51 of the report of the 
Comptroller of the Currency will be found a record of not only the 
7473 national banks but of 18,520 state banks, trust companies, 
private bankers and savings banks in respect to the character of their 
loans. Out of a total of $14,600,000,000 loans based largely on de- 
mand deposits $3,500,000,000 are secured by real estate and mort- 
gages, and $4,500,000,000 by other collateral,— $8,000,000,000 on 
fixed forms of property. The "other loans" are $6,500,000,000 in- 
cluding of course the so-called $3,600,000,000 commercial loans in 
the national banks as noted above. Of these the real commercial 
loans are somewhere between three billion and six billion. Private 
estimates of bankers with far better knowledge of the real situation 
than is possessed by the government officials vary all the way be- 
tween these two figures. 

We have for some time estimated that the real commercial loans 
for the transactions of commerce in this country do not exceed five 
billions and that between nine and ten billions of bank loans are on 
fixed forms of property. 

This represents property in process of digestion by investors. 
When the amount is large, or the investment fund is light, it is 
termed over-investment or indigestion of securities. 

Nearly two-thirds of our bank loans represent constructive 
industry — stocks, bonds and fixed forms of property in process 
of digestion — and only one-third represents commercial transactions 



XX 

OUR INVESTMENT DIGESTION. 

The highest estimate of growth in values in this country is 
seven billions per annum. This includes road building, house build- 
ing, and all forms of property accretion. It is not probable that 
more than two billions take form in stocks and bonds, or in such 
shape as to be available in bank loans. 

If, therefore, we have an investment digestion capable of 
absorbing two billions a year we are already and steadily over-invested 
by from four to five years. This over-investment is taken care of 
largely in bank loans. It is just as clearly property moving to market 
as hogs or cotton. 

Strange as the statement may appear, it is nevertheless a 
provable fact that the flexibility in our bank reserves is entirely 
in this ten billions and not in the five billions of commercial paper. 

The most fixed thing in the bank loans is the commercial paper, 
as Mr. Armour had to show the Chicago bankers in 1907. 

They asked him to reduce his loans. He exclaimed, "What! 
I who am liquidating the country and taking the cattle, sheep and 
hogs that are being daily sent to market to liquidate bank loans 1 
I who am pushing pork and beef over to Europe for money, must 
curtail! Gentlemen, I am the liquidator! What would be the con- 
dition of your bank loans if I turned these cattle back to the farms?" 

Mr. Armour was right. The theory is that a commercial loan 
based upon consumable products liquidates itself. But until the 
world stops eating and drinking or wearing clothes or consuming 
fuel, there is a new note right behind the one liquidated by the 
consumable commodities. Across the continent there is a line of 
sheep and a commercial note on the tail of each sheep in endless 
procession. There is no fluctuation possible with commercial notes 
based on consumable commodities unless prices are changed, or 
the capital of the merchant, or middleman, is expanded. 

It is Wall Street and its shrinkage in stocks and bonds; it is 
slaughter of the lambs, and the liquidation of margin held invest- 
ments that has eased money, in every pinch, up to 1913. 

One of the most sagacious financiers in Wall Street failed to 
buy securities in the latter part of 1913 because he was out of sorts 



THE FEDERAL RESERVE ACT. 71 

with the Administration and saw more clearly than Washington 
the danger of the situation. He declared, "1913 is 1907 over again. 
Wall Street has been liquidated out and there is no place for further 
liquidation. Therefore, any pinch must be met by suspension as 
in 1907." 

The whole industrial and commercial structure of the country 
in relation to bank loans may be pictured in the form of a pyramid, 
a third part of which at the top is the irreducible minimum of com- 
mercial credits based on the consumable commodities of the country. 
The two-thirds base is the fixed forms of property in process of con- 
struction and investment digestion. 

The top layer of this two-thirds, and representing less than 
5% of the fixed property forms, is Wall Street with less than 500 
millions in loans on margin securities, — the whole buffer or cushion 
and the vibratory receiver between these two forms of loans. It 
has been ground once or twice each year for a generation as the 
pressure has come upon the money markets of the country for seed 
time and harvests. The margin speculators, not in Wall Street 
but all over the country, have lost their fleeces in this squeezing. 
The denizens of Wall Street who survive are those who have dodged . 
Those who " Do not understand" lost their fleece and read "Frenzied 
Finance" for consolation and "got it again." The system was 
wrong. It was nobody's business to remedy it. "Everybody" 
assaulted Wall Street and nobody from Washington or the West 
went down to Gotham to inquire what the trouble was. 

All the bankers of Wall Street said, however, and said it emphat- 
ically, "Reform your bank act!" and that being the cry sent up 
from Wall Street, it went unheeded for a generation. 

Now Wall Street is to be reformed — to give commercial paper 
proper expansion! It may be seen from the above that there can be 
no proper expansion of commercial paper except, slightly, as the 
country grows. And as wealth grows faster than population there 
may be less need of commercial paper in the future than in the past 
unless there be expanding prices for labor and commodities. 



XXI 
CURRENCY, TARIFFS, AND LABOR NOW TOUCH ELBOWS. 

If the coming expansion were commercial, there would be more 
emphatic inquiry, "What makes the cost of living so high?" and 
more would be the echoes resounding down the future years, "Living 
so high!" 

The expansion under the bank act must go primarily to con- 
structive industry. Does this industry, the expansion of fixed 
forms of property, need more credit or any more currency? Cer- 
tainly not at first. 

With lowering of interest rates, there will be rising prices for 
stocks and bonds until the returns are so low that money is invited 
into the constructive field. Afterward it will require all the power 
of the Federal Reserve Board to hold Wall Street and the expansive 
building industry of the country in check. 

Over-investment in stocks and bonds is an absolute requisite 
in the construction and upbuilding of this country. When high 
interest rates are maintained, as in the past year, construction slows 
down and the moment there is a restoration of confidence, or pros- 
pects for higher investment prices as at the opening of 1914, there is 
a sudden outpouring of investment moneys. The undigested bonds 
are taken from the banks and the bank loans by the hundred million. 

We have money enough and credit enough to carry our com- 
mercial transactions and four or five years of over-investment. 
We need at least three years of construction or over-investment 
to be carried in bank loans before properties are in shape for diges- 
tion by investors. But do we need more than five years? And will 
there be danger under the new bank act in a few years of finding 
that we are six or seven years over-invested, our credit reserves ex- 
hausted and our currency base endangered? 

That question can only be answered by the new Federal Re- 
serve Board, and after all they may have very little to say about it 
at first. After re-discounting enough commercial bills to earn divi- 
dends on the new Reserve Bank shares and to insure against contrac- 
tion, they must rest their activities in this direction. 

A steady bank rate and the insurance of relief when needed 
will alone be sufficient to give confidence for construction expansion 
— outside the railroads. 



THE FEDERAL RESERVE ACT. 73 

With confidence, credit comes fully forth and with full credit 
there is little need for currency or Treasury reserves. Until one or 
the other is called for, the Federal Board can have little control 
unless it undertakes to regulate the future in finance and raises the 
money rate and curtails credit when confidence is in full swing. 

Capital itself — not Washington — will take the first alarm. It 
may be caused by heavy gold exports, crashes in railroad securities, 
shutting up railroad supply industries, or by enlarged labor pay-rolls 
exhausting bank reserves and forcing volumes of commercial paper 
from the member banks into the reserve banks for re-discount. 

Or the state banks and trust companies may say construction 
expansion has gone far enough and they will buy only acceptances 
or commercial bills and grant no more credit for new construction, 
or they may figure that they, being outside the reserve system, had 
better hold more gold and less government paper in their money 
boxes. 

The lending outside the reserve system based on demand 
promises will be greater than within the system, and especially so as 
regards construction and stocks and bonds. Here will be the first 
sign of trouble in future years. 

The trouble cannot come primarily from labor unions and 
wage increases (except with the public service corporations) for 
under our new tariff all margins of profit which labor might eat into 
have been whittled away. Demands for higher wages may only 
close mills and factories, and there is no remedy in the reserve act. 

No amount of credit in re-discounts, no low money rates and 
no new currency, whatever be its volume, can make unprofitable 
industry stand up. 

Our new tariff is our safeguard here. Under it America comes 
into touch with labor throughout the world and the manufacturing 
labor market connects with the European labor market under our 
reduced tariff protection. Our international gold markets and dis- 
count markets are also coming into closer home touch under the new 
bank act. 

The interest account is the very minor account, the wage ac- 
count is the maximum one. This is well illustrated in the case of 
Germany, which has advanced relatively more than any country 
in Europe the past generation, while paying the highest interest 
rates. 



xxu 

NEW BANKS NEED NOT BE EXPENSIVE. 

Washington needs to be reminded of one point in respect to its 
reserve bank organizations. Already the politicians and public 
servants are talking of regional reserve banks with 1000 and 1500 
clerks and the large amount of floor space required. 

If Washington is to open up banking business on this scale and 
is to continue its income tax on the present basis the best investment 
of surplus funds at the present time is in Washington real estate. 
The 30,000 unemployed who rushed to Detroit for Mr. Ford's 
five dollar a day minimum wage may be equalled by the rush for 
employment in Washington to sort out the income tax returns which 
are now being dumped by the ton into a building there and which 
will require an army of clerks to handle. 

There has been some misunderstanding of previous articles 
concerning the use of sub-treasuries and mint offices in connection 
with the establishment of the regional reserve banks. It was never 
in contemplation to use these offices except for storage purposes and 
then only at the start. 

The new banks are not to deal directly with the public. Personal 
interviews will be few. Until the clearing house function is put into 
operation they do not require any considerable floor spaces. 

Whatever may be the promises of politicians concerning the 
expanded clerical forces it will be a matter of extravagance if there 
are any regional reserve banks in this country requiring at any time 
a force of 1000 people. The largest bank, yet to be established, say 
at New York city, should require less than 500 persons. 

Some bankers figure that less than 100 persons should be able 
to do all the work of the regional reserve bank of New York for 
many months after its organization. 

On the average the reserve banks must have less than 1000 
accounts. They do not require much furnishing beyond a com- 
modious safe, upstairs counters, and ledgers. They no more need 
first floors than the big banks of New York City need first floors for 
their accounting. The Hanover and most other big national banks 
in New York city have their accounting forces and ledgers in the 
tops of the skyscrapers where land and light are cheapest. The 



THE FEDERAL RESERVE ACT. 75 

reserve banks will be mostly book-keeping propositions and the 
public is likely to learn therefrom that banking is a credit rather 
than a cash business. 

The New York banks that handle the largest volumes of money 
have the fewest personal calls. The big banks of Chicago and Boston 
do a far greater business with individuals than any bank in New 
York, although the footings of the New York bank ledgers are much 
larger. 

For purpose of future comparison we give the clerical force of 
the largest mercantile bank in the United States — the Old Colony 
Trust Co. of Boston — which has 27,000 accounts, 25,000 of which 
are active. There are big banks in New York whose reputation is 
worldwide that do not have one-tenth this number of accounts. 

In January the Old Colony Trust Co. at both its Court street 
and Temple place offices attended to the personal wants of 143,000 
visitors, or an average of above 5000 a day, besides its vast corre- 
spondence and its voluminous ledgers. It did this with a force of 
only 476 employees, including its 35 officers. 

Boston not only has the largest banking institution holding the 
largest number of mercantile accounts, but it has the most extensive 
clearing house system in the country. 

It is in two divisions. The local clearing takes place at 10 o'clock 
in the morning for 13 member national banks and the Sub-Treasury. 
Five outside national banks and 23 trust companies, including the 
Bank of Nova Scotia, also clear through these national banks, a 
total of 42 local bank clearances including the Sub-Treasury. A 
half hour despatches this business which last year aggregated $8,820,- 
976,374 in exchanges. 

But what makes the Boston Clearing House interesting is what 
is called its Foreign Department, where at 3.30 in the afternoon 
clearance is made for all the banks and trust companies of New Eng- 
land to the number of 644. 

This clearance system, which is the most extensive for country 
banks in the country, has often been cited for its maximum of effi- 
ciency and minimum of expense. 

New England exchange is here cleared at an expense of seven 
cents per thousand dollars. The clerical force numbers 18. The 
total exchanges for the clearing house year to April 1, 1913, were 
$572,297,780, and the expense was $39,990. 

The expense of the Federal Reserve Banks when they undertake 
the clearing house function will depend upon their methods of han- 
dling the same, also to what extent they use the existing clearing 
houses and bank forces. 



76 THE FEDERAL RESERVE ACT. 

Canvassing the larger banks of New York City for response to 
the question of expense and floor space required for the New York 
regional reserve bank, not a single one will hazard a guess. 

One bank estimates that it might be: "A pretty large operation." 
Another says: "Territory is yet too indefinite"; another reports: 
"Too little known and too few regulations at hand to form an esti- 
mate"; another says: "Until regulations are issued would not hazard 
a guess"; another large bank responds: "Don't know where the 
handle of the wheel is, to make an estimate." 

Nevertheless, we will adjoin these gathered statistics for any- 
body who wishes to guess. 

The National City Bank employs 477 clerks and has 78,600 
feet of floor space. 

The Chase National Bank has 230 clerks and 20,000 feet of 
floor space. 

The Guaranty Trust Co. has 370 clerks and six large floors. 

The Corn Exchange has 140 clerks and two large floors. 

The Fourth National has 150 clerks and 11,000 feet of floor 
space. 

The Mechanics and Metals has 160 clerks and 10,000 feet of 
floor space. 

Inquiries have been made if trust companies having authority 
under state laws to establish branches may continue this practice if 
they join the Federal Reserve System. 

We should advise any trust company, contemplating member- 
ship in the Federal Reserve System, to establish any contemplated 
branches before it enters that system. Branches allowed under state 
law and already established would probably not be interfered with 
by membership in the Federal Reserve System. The purpose of the 
act in respect to state banks and trust companies is that they may 
become members without changing their powers as derived from the 
state, but, as respects examinations and reserves, must conform to 
national bank regulations. 

There are national banks that have branches that were estab- 
lished before they entered the national banking system and they 
were permitted to come in and hold their branches but could not 
establish others. 

Trust companies or state banks with branches already established 
might very properly make application for membership with the 
Federal Reserve. It is wholly within the power of the Federal Re- 
serve Board to accept or reject any application. If a state bank 
were admitted with its branches, and it probably would be, there 
could be no objection to its continuance with branches until the 



THE FEDERAL RESERVE ACT. 77 

Federal Reserve Board elected to prescribe rules for all members 
concerning their branch relations. Then the state banks if they did 
not care to conform thereto might withdraw or be put out. A state 
bank can be admitted "under such rules and regulations" as the 
organization committee or the Federal Reserve Board may pre- 
scribe, but under the law the Federal Reserve Board must make 
bylaws requiring state banks coming into the system "to comply 
with the reserve and capital requirements and to submit to the 
examination and regulations." It is further prescribed in Section 9 
relating to state banks that on failure to comply with "the regulations 
of the Federal Reserve Board" the Board, after hearing, may require 
such bank to surrender its stock and receive back its cash paid 
subscription with interest. 



XXIII 
FEDERAL RESERVE NOTES AND BOND VALUES. 

It is asked if there will be two classes of Federal Reserve notes, 
one "for the purpose of making advances to Federal Reserve Banks" 
and the other for circulating notes based upon government bonds as 
provided in both Section 4 and Section 18. 

The issue of Federal Reserve notes under these sections is simi- 
lar to the issue of national bank notes secured by government bonds 
and this class of federal reserve notes should rank with national bank 
notes. These sections, in effect, extend the national bank act, in 
its provisions for bond-secured circulation, to the Federal Reserve 
Banks. But it prescribes that the Federal Banks shall not be limited 
in their issue of bond-secured circulation by the amount of their 
capital stock. 

This is of course necessary, as after two years the Federal 
Board has the right to require the reserve banks to purchase from the 
offerings of the national banks 25 millions of bonds per annum (in- 
cluding all their purchases) and they may take out a like amount of 
circulation against the bonds or may convert into 3% bonds without 
circulation privilege. 

Here again the wisdom of the Federal Reserve Board will be 
put to the test. It has the authority if the bonds are offered in 
retirement of national bank circulation to require the federal banks to 
take up 25 millions of such bonds for 20 years, or 500 millions in all. 
A 20% shrinkage in the value of these bonds is easily possible in time 
of war or national stress and such a shrinkage might involve the whole 
capital of the Federal Reserve Banks. 

If at the end of the 22 years the federal reserve banks are found 
laden with 500 million 2% United States bonds with the circulation 
privilege, there is the frightful possibility that the value of such 
bonds, even with circulation privilege, might be seriously dragged 
down by Washington proposals to issue two billion more which would 
be the amount then required for the purchase of the telephone in- 
terests of the country. 

If the Washington authorities had succeeded in stopping all 
railroad construction during this 22 years, halting railroad credit 
and construction that it might purchase the railroads a little more 



THE FEDERAL RESERVE ACT. 79 

cheaply, it would require 10 billions additional to purchase the 
railroads at $30,000 per mile and the lowest cash value of their 
equipment and terminals. 

It may be argued that the railroads could be purchased through 
their shares at $20,000 per mile, or for 5 billions. But certainly if 
credit were easier at two, three or even four per cent, government 
bonds would issue to take up the railroad indebtedness as it matured. 
And billions more would follow for the delayed improvements and 
extensions. 

Certainly within a generation 20 billions of bonds, if they could 
be sold, would be outstanding for the acquisition of telephones, tele- 
graphs and railroads if it was once determined that the government 
should own all these and meet the necessary (to say nothing of the 
popular) demands for improvements and extensions. 

It may be answered that investors forced out of railroad shares 
and bonds would be obliged to buy government bonds on a two to 
four per cent, basis. Investors would do nothing of the kind. They 
would purchase industrial bonds, securities of mercantile and trading 
companies, or loan their money abroad at better rates of interest. 
The Federal Reserve Act, with its foreign branch extensions, and 
the new tariff placing our prices more on a parity with those of the 
outside world, would both aid in the export of money to other coun- 
tries. 

The whole world has tried for many centuries to enslave the 
money of the individual and direct its work and return. It has 
failed absolutely; indeed has never had a show of success. The 
whole world could beat, imprison or crucify the Jew, but since he 
invented the bill of exchange he has been able to laugh at all his 
oppressors. 

"How is it," said a bright Virginia girl one evening at a Lon- 
don dinner table, addressing herself pertly to a South African gold 
king, "that you Jews go to South Africa and bring back the diamonds 
and the gold and yet you never seem to work?" 

With a benign countenance the South African millionaire smiled 
upon her and replied: "We don't drink. We trade, and therefore 
we don't have to work; you English work and drink and then must 
work some more." 

And the little lady thus had her lesson in both temperance and 
finance. 

It behooves the Washington authorities if they would insure 
the success of the Federal Reserve Act to put a strong hand over the 
mouths of the yap who would have the American eagle scream from 
the capitol that this government can buy its telegraphs, its tele- 



so THE FEDERAL RESERVE ACT. 

phones, and its railroads, and issue billions of bonds therefor, un- 
less the government is quite willing that at the same time the Ameri- 
can eagle shall scream to all the world the destruction of the national 
banking and Federal reserve systems. 

Bond dealers and investment houses can measure with fair 
accuracy the value of United States 2, 3, or 4% bonds without 
the circulation privilege, when limited to the existing amount of 
bonds, but no man lives who can give a close guess, of the 
world's appraisement in market quotations, of United States two, 
three or four per cent, bonds issuing by the billion. 

Credit is sensitive to talk and agitation. 

The fall in English Consols from 114 in 1896 to 71^ in 1913 is 
not explained by either the South African war or the change in their 
rate of return. A large part of that decline is due to the issue of 400 
million dollars of Irish land stock to assist the tenant farmers of 
Ireland to buy their land. Fifty million dollars a year have been 
issued now for eight years and it is expected to continue for eight 
years more at this rate. 

Those who get the cash for their estates in Ireland do not seem 
to be very hearty supporters of Consols by reinvestment therein. 

If the government once enters upon the policy of telephone 
and railroad purchase in the United States, and the fall in English 
Consols is any criterion, the price of United States 3% bonds with- 
out circulation privilege will in this country be under 70. There 
may then be a question as to the value of the different kinds of notes 
issued by the Federal banks: First, those issued by the United 
States Government for the Federal reserve banks on the security of 
commercial paper; next, those issued on the security of bonds pur- 
chased by the banks themselves; and thirdly, those notes issued on 
the security of the bonds which the Federal Board has forced them to 
purchase. 



XXIV 
RESERVE DEFICIENCIES. 

The new Federal Reserve Board will have power to suspend for 
thirty days and to renew such suspension for fifteen-day periods any 
"reserve requirements," but it must "establish a graduated tax upon 
the amounts by which the reserve requirements of this Act may be 
permitted to fall below the level hereinafter provided." But it is 
specifically provided that when the gold reserve under the notes falls 
below 40%, the Federal Board shall establish a graduated tax of not 
more than 1% per annum upon such deficiency until the reserves fall 
to 32|%. Now comes a little new puzzler in taxation. 

It reads as follows: 

"When said reserve falls below thirty-two and one-half per cen- 
tum, a tax at the rate increasingly of not less than one and one-half 
per centum per annum upon each two and one-half per centum or 
fraction thereof that such reserve falls below thirty-two and one-half 
per centum. The tax shall be paid by the reserve bank, but the 
reserve bank shall add an amount equal to said tax to the rates of 
interest and discount fixed by the Federal Reserve Board." 

How to add an amount of tax on a deficiency, that may exist 
only for a day, and have it equally applied to a rate of discount re- 
quires a little study. 

One of the biggest banks in the country replied that, although 
it had more than four hundred men in the institution, it had not 
therein brains enough to interpret this into concrete figures. 

Professor 0. M. W. Sprague, in the Quarterly Journal of 
Economics for February, 1914, in an article on the Federal Reserve 
Act, which everybody interested in the working out of the Act 
should read, says: "The arrangement would seem to be a most 
unworkable one, since there is no means of knowing to what extent 
a borrowing bank will have occasion to use the proceeds of its loan 
in the form of notes. Fortunately this provision of the Act is never 
likely to become operative." 

On the contrary, the whole danger in the Federal Reserve Act 
is the possibility of expansion or inflation with loss of gold reserves 
forcing credit contraction. 

Provisions that cannot be interpreted or made operative do 
not beget confidence in their remedial virtues. 



82 THE FEDERAL RESERVE ACT. 

The Federal Reserve Act is to operate for very many yean 
and, with threatened export of gold and possible great expansion 
of reserve bank notes, the possible deficiency in gold reserves must 
be carefully taken into account and considered. 

Reserve banks must hold 35% in "lawful money" against 
deposits, but when those deposits are called for in currency the re- 
serve requirement so far as currency is issued becomes immediately 
40%. 

The only safe conduct in r«spect to Federal Bank reserves is 
to keep them so far as possible in gold. This should not be difficult, 
as the member banks, and the entire system, must rely upon the 
reserve banks to maintain both commercial credit and the gold re- 
serve. As the 35% "lawful money" reserve against the deposit 
liability is practically interchangeable with the gold reserve (both 
reserves were previously proposed at 35%) , the wisdom of the law 
making the tax 1% per annum upon deficiency in the gold reserve 
down to 32£% is apparent. The Federal Reserve Board will, there- 
fore, be able to make the same penalties on reserve deficiencies both 
as respects the gold reserve and the deposit liability reserve. 

The question is, How to assess the reserve deficiency tax by 
adding it to a rate of discount? 

Suppose a member bank, approaching the reserve bank with 
"eligible" commercial paper, and desiring bills for payroll account, 
is informed that the re-discounts offering that day are liable to so en- 
large the issue of Federal reserve notes that the present 40% in gold 
reserve will drop to, say, 31%, the member bank may elect to borrow 
on its short-term paper and thereby become liable for only a brief 
period in which the deficiency exists. Nevertheless, as it passes 
the reserve notes over to its customer on a longer time discount it 
may add to the discount rate for the whole period of the discount this 
day's tax on deficiency, applying it to every day of the discount. 
The member bank itself must pay in discount 1% above the estab- 
lished rate previously prevailing. 

As a 40% reserve is required, a one per centum tax upon the 
deficiency means four-tenths of one per centum added to the discount 
rate. This increases by 50%, or to l£% on the deficiency, when the 
reserve is below 32£%, thus adding six-tenths of one per centum, 
and making one per centum to add to the discount rate. 

If the established rate is 6%, and, of course, it would be at least 
this when reserves are in jeopardy, the whole matter may be put in 
tabular form as below. In the first column is shown the falling in 
reserves. In the next column is shown the tax on deficiency. In the 
third column is this tax on deficiency transposed into a rate of in- 



THE FEDERAL RESERVE ACT. 



83 



terest on the loan. A one per centum tax on the deficiency where a 
40% reserve is required, means, of course, 0.4% when applied to 
principal. The fourth column shows the rate of discount by adding 
this deficiency tax rate to a normal rate of 6%: 









Rate added 


Discount 




Tax on 


todis. 


rate on 


Reserve 


deficiency 


rate 


6% basis 


40 . @. 


32*% 


*1% 


0.4% 


6.4% 


32*.. @. 


.30 % 


t2*% 


1.0% 


7.0% 


30 . .@. 


.27*% 


4 % 


1-6% 


7-6% 


27*.. @. 


.25 % 


5*% 


2-2% 


8.2% 


25 . .@. 


.22*% 


7 % 


2.8% 


8.8% 


22*. @. 


.20 % 


8*% 


3.4% 


9.4% 


20 . .@. 


■ 17*% 


10% 


4.0% 


10.0% 


17*. @. 


15 % 


H*% 


4.6% 


10.6% 


15 ..@. 


■12*% 


13 % 


5.2% 


• H.2% 


12*.. @. 


.10% 


14*% 


5.8% 


11.8% 


*Maximu 


m. 









tThis and the following rates are the minima permitted. 

It will be noticed that when the gold reserve drops below 20% 
a 10% tax on the deficiency becomes likewise a 10% discount rate. 
If the gold reserves should fall to 10% the discount rate would be 
12.4%. 

Any expansion or inflation would be in the way of correction 
long before extreme rates were reached. 

Nothing less than this would be a corrective, for any interpre- 
tation that would give borrowers the benefit of a shorter term in the 
deficiency would be highly speculative and would not correct the 
situation. 

The member bank is under no legal obligation to charge or 
transfer to its customer the tax of the Federal Reserve bank for 
federal reserve note accommodation when gold reserves are deficient. 
Member banks can, of course, at any time charge their customers any 
interest rate. But the Reserve bank will be taxed by the govern- 
ment daily for its reserve deficiencies, and every day it discounts it 
must add the government tax to its rate of discount, in its accom- 
modation to member banks. 

The member banks must, therefore, pay in a rate of discount 
the day's tax on the deficiency multiplied by the number of days of 
discount. This may add to the Reserve bank's profits because it 
may collect of the banks many times more than the amount it pays 
the government. However, there is no incentive for profit as in the 



84 THE FEDERAL RESERVE ACT. 

end the government gets all the earnings above 69( cumulative divi- 
dends on the Federal reserve bank shares. 

It may be thought that the member banks can borrow on call 
of the Reserve banks, but the Act nowhere contemplates any call 
loans. The Federal Reserve notes are issued only in re-discount of 
commercial paper and must be secured thereby. 



XXV 

THREE PER CENT. MONEY. 

"A mighty feast of fat things awaits the world of trade," de- 
clares Moreton Frewen in the London Financial News, reviewing our 
Federal Reserve Act and quoting President Wilson's benediction in 
signing it: "Nothing can be for the interest of the country which 
is not in the interest of everybody." 
Frewen closes as follows: 

"Fully reviewing the bill just passed, why should we 
not, by its help, all enjoy 3 per cent, money rates for some 
years to come? And if this act, in England, Europe, 
America, does blaze the trail to cheap money, high wages 
and brisk business, should not all other governments, even 
as Uncle Sam, become bill discounters? The act presents 
us really with a new chapter in monetary science." 
"For some years to come," is the refrain of the inflationists. 
Let it be hoped that the emphasis will rest rather on the permanence 
of this "new chapter in monetary science." 

The jubilation of Moreton Frewen and of all England and of 
all Europe over Uncle Sam's new bill as "a mighty feast of fat 
things" for the whole world should not for one moment be forgotten. 
It was perfectly clear to some financial observers twenty years 
ago that if the campaign for the remonetization of silver, so ably 
supported by Moreton Frewen, failed nationally and internationally, 
it would be the British Empire, with its crown of gold on a silver 
base in India, that would within this generation feel the pinch for 
gold more than America. That time has arrived, and the United 
States has now reached a position where it could be dominant in the 
world's money. 

Is it to throw away this advantage after twenty years of ac- 
cumulation? 

First, last and all the time, the danger in this bank act is the 
demand for 3% money. It stalks boldly to the front in Section 27, 
continuing the Aldrich-Vreeland Emergency Currency as 3% money. 
Certainly we have reached "a new chapter in monetary science," 
if reserve and emergency currency can be safely put out on a 3% 
basis. 

While the Reserve Act was in construction the question was 



86 THE FEDERAL RESERVE ACT. 

asked in the private debates at Washington as to why the Aldrich- 
Vreeland reserve money was never to be availed of. One party said: 
"No bank would borrow money of the government at 6% and loan 
it out again with the rate increasing 1% per month. In a short time 
it would be 10 r , money. Senator Aldrich says the Act is unworkable 
and cannot be amended to work." 

Thereupon a modest senator replied: "The intention of that 
Act was 10% reserve money. It was never meant that the currency 
should issue until money was 10%." 

"How can you say that?" 

And the senator responded: "I can say it because neither 
Aldrich nor Vreeland wrote that Act. I can say it because I wrote 
it myself and the intention of the so-called Aldrich- Vreeland Act was 
to supply money at 10%." 

As amended in December by the present Congress the Aldrich 
Act now reads: 

"For the first three months a tax at the rate of three 

per centum per annum * * * and afterwards an additional 

tax rate of one-half of one per centum per annum for each 

month until a tax of six per centum per annum is reached, 

and thereafter such tax of six per centum per annum upon 

the average amount of such notes." 

It has been previously noted in these articles that, during the 
three-year period in which reserves are being transferred from reserve 
and central reserve cities to the federal reserve banks, reserve city 
banks are permitted, for the first time, to keep reserves with each 
other. This may not be important, because temporary. 

But toward the end of the same Section 19 there is a provision 
under which abuses may grow up. This provision is: 

"In estimating the reserves required by this act, the net 

balance of the amounts due to and from other banks shall 

be taken as the basis for ascertaining the deposits against 

which reserves shall be determined." 

It is a widespread belief that this is a provision copied from 
the national bank act. 

It may surprise a great many bankers to learn that there is not, 
and never was, any such provision in the national bank act. 

The national banks have been conducted now for many years as 
though this were a part of their constitutional provision privilege. 

The authority, however, for this universal practice among 
national banks is to be found only in a ruling from the Comptroller 
of the Currency. It is now incorporated in law. It can be subject 
to some abuses. 



THE FEDERAL RESERVE ACT. 87 

Suppose a small bank losing $1,000,000 in deposits desires to 
conceal the same in its advertised or published statements. It has 
only to make an exchange transaction with another bank, and, with 
or without the passing of checks or drafts, banks, operating in con- 
junction, may credit each other with $1,000,000 of deposits, against 
which no reserve is required. 

The desired covering up of the hole in a bank's deposits may 
thus be effected. 

If it is answered that the Comptroller or the Federal Board 
would quickly detect this practice, it may be rejoined: How could 
it be detected if the banks were corresponding banks, and the bal- 
ances were accumulated each as agent for the other in check collec- 
tions? 

Here is a subject for thought when, if ever again, Congress 
is called upon to discuss the question of bank deposit insurance. 

The only insurance in bank deposits is honor, and this cannot 
be had by legislation. 

The Untermyer provision in Section 22, providing that other 
than the usual compensation from the bank, "no officer, director, 
employee, or attorney of a member bank shall be a beneficiary of, 
or receive, directly or indirectly, any fee, commission, gift, or other 
consideration for or in connection with any transaction or business 
of the bank," was meant, after years of agitation, to stop the pay- 
ment of personal gifts or commissions in connection with bank loans. 

But the act is so broad that a commission note broker cannot 
now sit on a board of directors and receive any part of any commis- 
sion paid his firm for selling paper to or negotiating a loan at that 
bank. 

Directors who are members of banking firms doing a commis- 
sion business, or having bank accommodation, must consider this 
clause very carefully. 

It is good opinion in legal and banking circles that, although 
this clause is much broader than was intended by its framers, the 
courts will construe it according to its language. 

Therefore, the only safe course is for members of banking houses 
borrowing or doing business with any bank, to be sure they are not 
directors of that bank, or that their house does no business with or 
at that bank, directly or indirectly, while they are on the board. 

There is only one way to insure this and that is to get out of 
bank directorates. 

If ownership in the bank is such as to demand that a banking 
house have representation on the board, it must get somebody out- 
side to represent it upon the board. If the substitute is not a dummy 



88 THE FEDERAL RESERVE ACT. 

director, he may very soon forget who placed him on the board, and 
there may be no loss in the efficiency of the bank direction. But 
if dummy directors are substituted, the efficiency of the bank direc- 
tion will be impaired. The dummy director will be simply a reporter 
to the man who placed him there. Even in this position, it is doubt- 
ful if the dummy director could receive any compensation, or be in 
any way in the employ of the banker. 

The proper method of maintaining bank direction efficiency, 
and complying with the provisions of this section, is to adopt the 
Carnegie system; make the employees of the bank the directors, 
and let the minutes of the directors' meetings be sent to the interested 
shareholders, who may thereupon promptly, as did Mr. Carnegie, 
return advice and suggestions. 

The advising bank shareholder would then probably not come 
under the penalty for violating any provision of Section 22, the maxi- 
mum of which is a $5000 fine and one year inprisonment. 

Bankers should take note that this provision went into effect 
Feb. 23, or 60 days after the passage of the act. 



XXVI 
TIME DEPOSITS AND CALL LOANS. 

One of the most sweeping changes that may take place under the 
new bank act will arise from the transfer of demand deposits to time 
deposits. 

In Europe a majority of the bank deposits are on time. Rates 
of interest are scientifically regulated so that demand deposits draw 
very little interest. Deposits payable on thirty days' notice draw a 
fair rate of interest, and six months' and year deposits draw up to as 
high as 4%. 

In this country the custom has been for almost everybody to 
feel that money in the bank is money in hand. Such is our spirit of 
freedom and independence that almost everybody hugs the delusion 
of his own competence to invest his money either for a month or a 
year, and he therefore cares for no bank moneys, except those which 
are spot cash. But wisdom will eventually prevail in this, as in all 
other realms. 

Time deposits are sure to grow under the stimulus of the new 
bank act, which cuts the required reserve on time deposits, defined 
as "payable after thirty days," to 5%. This definition was in- 
serted in the first paragraph of Section 19, at the last conference be- 
fore the passage of the act, and at the request of the country banks. 
President Andrew J. Frame of the Waukesha National Bank, Wis- 
consin, was as much responsible for it as anybody, and he figures 
that it will cut down the home cash requirements on this class of 
deposits to approximately 2%. 

It is estimated that there are about $800,000,000 of time de- 
posits in the national banks — time certificates of deposit were re- 
ported in October as $534,000,000. A provision which cuts down the 
new reduced reserve requirements by more than 60% further may 
stimulate the banks to invite their customers to mark a considerable 
part of their deposits as time deposits. 

It can be readily pointed out now to any borrowing depositor 
that his deposit should be kept up to about one-fifth of his borrow- 
ings. Therefore a depositor borrowing $1,000,000 and keeping 
$200,000 on deposit, can be quickly induced hereafter to see the 
wisdom of assisting the loaning power of his bank by marking $200,- 
000 of his deposit as subject to 30 days' notice. Should he desire to 



90 THE FEDERAL RESERVE ACT. 

check against his deposit below his time line, he will find it a little 
more mutually helpful to make a temporary borrowing of the bank, 
instead of a draft on his deposit. 

He may thereby assist the bank in a central reserve city in keep- 
ing a part of its deposits in such shape that only a 5% reserve is 
necessary, instead of an 18% reserve, as required on demand, on 
the usual deposit account. Indeed, he need only start with a 
"time deposit," payable after thirty days, and thereafter all his de- 
posit is "time deposit." 

Such a practice extended through the country could very quickly 
cut the reserve requirements so that instead of $400,000,000 bank 
reserves being transferred to the Federal banks, less than $200,000,- 
000 would be transferred. There would then be no necessity for re- 
discount with the reserve banks in making any instalment payments. 

Therefore, the new Federal Reserve Board had best go a little 
slow in calling for more than $50,000,000, or one-half the subscribed 
capital. 

A change of interest in brokerage circles is likely to follow the 
inauguration of the new banking system. It will be the making of 
brokers' call loans nearer in rate to mercantile time borrowings. 
In other words, time borrowings will come down, and demand loan 
rates will go up. The banks in central reserve cities, subject to 
great fluctuations by reason of their holding of other bank reserves, 
have been accustomed to keep their line of secondary reserves in 
brokers' and bankers' call loans at the lowest rate of interest, because 
of the quickness of the payments on call. When banks may step 
over to the Federal reserve bank and re-discount at, say, 4%, with 
commercial paper, they will have no necessity for their extended loans 
on quick call in bank and brokerage circles; and all borrowings, time 
and demand, will approach a more uniform rate of, say, between 3£% 
and 4£% — for a time. 

The above change in the demand loan market, by reason of 
the transfer of the banks' secondary line of reserves from brokers' 
call loans to the Federal Reserve banks, will withdraw a great stimu- 
lus from stock speculation in New York and possibly in a minor de- 
gree as respects Boston and Philadelphia, which have the next largest 
stock exchanges. 

When a broker, as in periods of easy money, is urged by his 
banker to make use of very low rate call money, the stimulus to the 
broker to solicit business throughout the country on a 4% to 6% in- 
terest basis, where he is paying only 2%, is very great. The broker 
not only gets the commissions, but can make an equal amount of 
profit on his interest account. 



THE FEDERAL RESERVE ACT. 91 

Many of the largest brokerage houses of the country have felic- 
itated themselves on their ability in some years to pay their entire 
expense from their interest account, leaving the stock commission 
account as "velvet," or clear net profit. 

As previously stated, neither the broker nor the banker is re- 
sponsible for this situation. The responsibility is national and is in 
the bank act which centralized reserves in New York and left only 
a call loan market for flexibility. 

Of course, a great question in the financial world is as to what 
effect the withdrawal of bank reserves by the hundred millions from 
New York City may have upon the banking power of New York and 
its financial supremacy. 

It should be clear from considerations already set forth that 
under the Act the financial profits of New York as of all other finan- 
cial centers must be expanded rather than diminished. 

The advantage of the re-discount privilege with the Federal 
Reserve Bank may prove greater than the loss by bank deposits. 
New York banks will get a higher rate of interest on their call loans 
and can move with greater confidence in financial transactions with 
the knowledge that at any moment they can re-discount their com- 
mercial paper. 

This constitutes for the New York bankers not only a stronger 
and safer, but more profitable line of secondary reserves, and com- 
bined with reduction in reserve requirements should fully compensate 
for the loss on deposits from other banks. 

There is also in the Act that which the banks themselves ap- 
pear not yet to have realized — the possibility of multiplying their 
financial power and resources by adopting the Continental system 
of time deposits, which system is just as applicable to New York 
banks as to European banks. 

One of the great advantages the trust companies have had 
over the national banks is that they could pay 3%, and sometimes a 
fraction more, for time deposits, as the state laws call for no reserves 
against these. 

Now, the national banks of New York will be on a much surer 
footing in competition with the trust companies. 

They not only have their reserve requirements reduced more 
nearly to the requirements of the trust companies, but they can 
compete for time deposits, and they may apply, under Section II., 
Paragraph K, for permission "to act as trustee, executor, adminis- 
trator, or registrar of stock and bonds." 

Large national banks are preparing to apply for this permission. 

Competition between national banks and trust companies will 
be keener hereafter. 



92 THE FEDERAL RESERVE ACT. 

The trust companies and state banks are already before the 
legislatures asking reduction in their reserve requirements and ex- 
pansion of their powers. 

When it comes to state and national governments competing 
to reduce bank reserves and expand bank powers, who can foretell 
all the results? 

There will certainly be money enough to go around and New 
York will have facilities for all the banking business that it now does, 
and likewise facilities for many years of growth and -expansion. 

The purpose of the Act will be carried out likewise in the up- 
building of other financial centers. Boston, Philadelphia and other 
cities, and possibly towns, will call home part of the reserves they now 
keep in Reserve and Central Reserve cities and will stimulate local 
enterprise with local borrowings at fair rates, confident that in time 
of stress they will have "eligible paper" for re-discount with their 
Federal Reserve Bank; and this directly, without the intervention 
of any Reserve City or any Central Reserve City bank. 

It is not believed that there will be competition, at least in the 
East, between savings banks and national banks, but in the West, 
where the national banks have to a larger extent established savings 
departments, the growth of savings may be with national banks 
rather than by any expansion in the number of independent savings 
institutions. 

Although the Reichsbank has 495 branches throughout Ger- 
many, it is not believed the Federal Reserve system will call for the 
establishment of anything like this number of branch banks in this 
country. 

But branch banks may ultimately be set up to the number of 
clearing house centers, of which there are at present 162. 

The primary estimate for branch banks is a possible hundred. 

When the Federal Reserve Act was passing through Congress 
many changes were suggested in the various forms of our national 
currency. 

The answer to all these suggestions was: "When we get the 
bank bill through we will take up as another measure the amalgama- 
tion or unifying of our varying forms of currency." 

It is not believed, however, that Washington or the country 
will care for any further financial debate, at least until the Federal 
Reserve Act is in extended operation and well beyond all the experi- 
mental stages. 

Therefore, no immediate additional financial legislation need 
be looked for soon, except as the new Federal Reserve Board may 
apply for some slight amendment to this latest bank act. 



XXVII 
SEVEN POSSIBLE INFLATIONS. 



The problem of inflation — proper and improper — under the 
new bank act presents so vast a field of possibilities that it can be 
touched only in outline. 

The first inflation has already been felt throughout the civilized 
world. It is the proper inflation of confidence begotten of the fact 
that American bank reserves, the United States Treasury reserves, 
and the nearly two billion of gold in the United States are to be un- 
shackled under the new bank act for the commerce and finance of the 
world. 

The benefits of this expansion are withheld from American 
industry by the refusal of the Washington authorities to give credit 
to fhe greatest customer of industry — transportation. 

When once the railroads of this country are unleashed, no man 
can measure the proper expansion that will be given to legitimate in- 
dustry and commerce from something expressed by the sole word — 
confidence. 

The president of a New York bank, ranking as one of the strong- 
est, but not one of the largest or oldest, says: "My bank has three 
million dollars gold in its vault but since 1907 I have either gone to 
sleep, or awakened, or been awake every night with a reflection for 
a minute or so as to what would be the result in my bank if somebody 
shied a brick through the window of its general credit. 

"With any lack of confidence in my bank its three million gold 
would flow out in a few hours and any call for re-discount or financial 
assistance might forever end the progress or career of the bank. 

"The moment this Federal Reserve Act goes into effect I shall 
sleep more soundly. I shall not have watchful eye on that three" 
million gold. I shall have only to watch the character of my mer- 
cantile discounts and thereby feel reasonably sure that nobody can 
shy a brick through my credit window, for my loans can through the 
Federal Reserve Bank command the cash to pay every depositor on 
demand. If I have bonds in my reserves I can sell them in a market 
without every other bank competing with me in the sale." 

The second inflation, and this is the beginning of danger, is 



94 THE FEDERAL RESERVE ACT. 

when the new system is inaugurated and the cash reserve require- 
ments drop by the sum of 2G0 millions. 

If the system is inaugurated in the late spring or early summer 
and its effect has not been previously unduly anticipated, there 
should be a second outpouring of money for bond investments. 

If the inauguration of the system is postponed until fall it wilt 
be within the power of the Treasury by withholding its moneys 
from the banks to advance the money rate and curb any investment 
fever. 

The third form of inflation may come through the transfer of 
demand deposits into deposits on time, or as defined by the Act, 
"payable after 30 days." As previously noted, more than half the 
deposits of European banks are time deposits with graduated rates 
of interest. 

It is a little strange that, with no reserve requirements for time 
deposits in trust companies, there has not grown up a more extended 
system of credits based on time deposits. 

But in the forthcoming sharp competition, between state banks r 
or trust companies, and national banks, time deposits are pretty sure 
to steadily gain at the expense of demand deposits, thereby cutting 
the reserve requirements so that in effect banks throughout* the 
country will hereafter require no more cash than they themselves 
consider necessary to promptly meet their daily needs. 

In effect, with the transfer to time deposits there is not only the 
elimination of all fixed reserves but the practical abandonment of 
cash in reserve in the bank. The real reserve is with the Federal 
reserve banks, and the necessity therefore doubly obtains for their 
carrying the very largest reserves and inaugurating the new system 
with no primary efforts at money-making. 

It is within the power of the secretary of the treasury to hold his 
hand firmly on the fourth power of expansion in the Reserve Act, to 
wit: the deposit of the United States Treasury reserve moneys which 
may range anywhere from 150 to above 200 million dollars. This 
money properly belongs in the banks. It is the people's money, im- 
properly withheld from bank and pocket circulation, but its sudden 
restoration would be just as much expansion or inflation as would 
be a sudden import of gold by the hundred million or the creation of 
additional currency. 

The fifth power of inflation may be found in the extension of 
credits outside the banking field through "acceptances," and this 
may have a very steadying influence. 

If banking concerns, with sufficient capital, are established in 
this country to make commercial acceptances liquid in an open mar- 



THE FEDERAL RESERVE ACT. 95- 

ket, in conjunction with the acceptance allowed in commercial trans- 
actions under the new bank act, there may be a very broad bill 
market in this country inviting investment moneys. As explained 
in a previous article, this is not the American system and it is not yet 
clear that outside acceptance and discount markets inviting either 
home or foreign investment capital can be readily set up here. But 
the possibility is clearly encouraged by the Act broadening bank in- 
vestments into the exchange and acceptance market. 

Indeed the Act is so broad in this respect that Federal Reserve 
Bank moneys may yet carry millions in stocks and bonds although 
they cannot do this directly for member banks. 

To be useful the federal banking system must be put into the 
outside foreign exchange and acceptance markets and then in times 
of need it can call in this money without disturbance to the home 
markets. This is one of the great elements of value in the coming 
financial system. It is designed to make easier international ex- 
change, which means freer flow of capital between countries. 

In the purchase of some forms of exchange no limitation can* 
be set up as respects bankers' bills whether they are based on wheat 
or bonds. 

Certainly if Morgan sells 10 million of Southern Railway bonds 
in London his draft for the money should be good international ex- 
change. What is the difference, so far as the exchange market is 
concerned, if another New York banker borrows 10 millions in Lon- 
don against bonds? Both are mere transfers of money, so far as 
the reserve bank is concerned. 

What, therefore, is to prevent the loan of London money in. 
New York on stocks and bonds when the rate is attractive? 

The reserve bank assisting in the transfer of money thereby 
facilitates the loan and indirectly must give support to financial 
transactions upon stocks and bonds. 

The broadening of our market in the international field will not 
only beget confidence in American securities and loans, but will! 
tend to the leveling up of money throughout the world. 

If a local acceptance market is set up in America, this likewise 
will tend to the leveling up of money between centers. 

Where, for instance in New England, money is habitually bor- 
rowed in anticipation of taxes on city and town notes from local funds 
and at very low rates of interest, the rate will be higher as the op- 
portunities for investment are broadened. 

A holder of surplus funds who does not wish to buy stocks or 
bonds and is not familiar with mercantile notes has only a very 
narrow market for funds. He will buy town notes in anticipation. 



06 THE FEDERAL RESERVE ACT. 

of taxes, hut if he could have various maturities of well drawn and 
well endorsed and accepted paper, with familiar names on the ac- 
ceptance, he would have greater variety as respects names and ma- 
turities for his investment and might buy such paper in preference to 
town notes. The result would be discounts at a steadier rate, with 
a broader market, and town notes might have to compete therewith. 

The sixth power of inflation — before we lose a good measure 
of gold in the international markets — may be found in the field of 
government regulations for the transfer of moneys. How this will 
work out no man can tell. It begins with the postoffice and the new 
postal money order law providing for the issuance of money orders 
payable at any one of the 40,000 odd money order offices and rami- 
fies through the whole gamut of clearing house and check collections, 
rides for which have yet to be established. 

How this will work out, and whether as a measure of conser- 
vation or inflation, it is not worth while at the present time to at- 
tempt to consider; for such changes must be gradual and their 
effect very many months ahead of us. It need only be alluded to 
here. Today many millions in checks are doing duty as money in 
place of bank bills. 

Fundamentally there is no difference between a bank bill and 
a check. A bank bill is a check upon the bank drawn by the cashier 
and the president under the direction of the government and may 
circulate in pocketbooks for a year before it is finally cashed at the 
bank or by the 5% redemption fund in Washington. A check may 
circulate in the mails and through the pockets of the receivers for 
some weeks. But even passing between banks it may circulate and 
perform a measure of duty in substitution of bank bills by from three 
to four days. 

Of course the great volume of checks is local and clears in 24 to 
48 hours through the local clearing house, but outside checks will 
do duty as money for three to five days on the average. 

For instance, John Brown in Texas may send his check on a 
New Orleans bank to New York for $10,000. His correspondent 
in New York credits the check as cash on his account and may de- 
posit it in the Hanover. There it is credited to the customer's ac- 
count and the bank has the internal problem of its disposition and 
collection. Anywhere between New York and New Orleans it may 
be charged up against the bank on which it is drawn or offsets ap- 
plied against it. It may do duty at many points in substitution of 
real cash and yet may be found a little bit questionable when it 
reaches its redeemer in New Orleans. John Brown may have to be 
notified that his check dated ten days previously has been cashed 



. THE FEDERAL RESERVE ACT. 97 

but owing to the fact that other drafts upon his account arrived first 
he is a trifle over-drawn. Yet the check did money duty all the way 
around . 

There was danger in the first draft of the new currency bill 
that it would give opportunity for just about 600 millions of check- 
kiting. 

It is estimated that anywhere from 300 millions to 600 mil- 
lions of checks in transit are daily performing more or less the func- 
tion of bank bills. 

Every bank has its rules and regulations and customs, and these 
are various with its customers and correspondents in respect to credit- 
ing and debiting of checks and retardation and acceleration of check 
collections. 

When the Federal Reserve Board comes to deal with the problem 
of clearances, exchanges and check collections, it will be in the mazes 
of a vast vibrating monetary nerve system of which the public and 
the political authorities know today substantially nothing. 

There are so many possibilities here that it is not profitable 
to discuss them in detail at the present time. 

The seventh and final possibility of inflation will arise from any 
maladministration in connection with the expansion of the new federal 
reserve notes. 

Properly administered these notes should be used as reserve. 
If they are used to promote expansion instead of, as properly, a regu- 
lator in respect to the expansion which the creation of a sound reserve 
system is inherently bound to produce, they will spell disaster of the 
direst type. 

It may be years before a federal reserve note is issued and it 
should be many years before they are issued in any large volume. 

But the possibilities of their issue on the present gold basis 
must be outlined and will be dealt with in the next and final article. 



XXVIII 
INFLATION BY NOTE EXPANSION. 

Previous articles have dealt with various possibilities of expan- 
sion and inflation arising from confidence, lower cash reserves, time 
deposits, treasury deposits in banks, check circulation, and new forms 
of discount. The possible expansion in credit from the reduction in 
bank reserve requirements has been figured at between two and three 
billions. 

As to the expansion, or the inflation, that may some time arise 
from the deposit of government gold or other moneys with the re- 
serve banks, this is not at all dangerous, because against govern- 
ment moneys must be kept 35% in lawful money reserve in the federal 
banks. The danger here will arise, if ever, when the government 
makes application to become a borrower, which can be accomplished 
only after amendment of the bank act. The government now has no 
commerce upon which it could make commercial paper for re-dis- 
count. 

The government today has far greater powers to expand credit 
by depositing its money directly in the national banks than it will 
have under this Act, so far as it elects to deposit in the Federal 
banks. 

The deposit of the government gold will give a basis for the new 
federal notes whenever the commerce of the country shall demand 
them, which may not be for some years. 

The purpose of this article is to show the possibility of expan- 
sion or inflation in this seventh form, or by the new federal notes. 

If the entire capital of the reserve banks is paid by, or trans- 
muted into, gold there is no deposit liability against such gold, and 
notes may be issued, as called for, to the extent of 250 millions with 
such 100 million capital furnishing the 40% gold reserve. 

So far as gold is paid in on reserve or deposit account — and 
these are one — a 35% legal money reserve must be maintained 
against the deposit liability. 

As the member banks must maintain Federal reserve and work- 



THE FEDERAL RESERVE ACT. 99 

ing balances — and these are likewise one — and must make part of 
their payments during the next three years by re-discounts in order 
to prevent contraction, the application for the new federal reserve 
notes will come through member banks desiring currency and offering 
the security of their commercial re-discounts therefor. 

The maximum of currency to issue is measured by the maxi- 
mum of gold that can be gathered in the reserve banks. 

It is the theory of the best economists in the world that the 
new reserve banks will be in position to sift out all the gold from the 
circulating currency, and that, this being to their interest, they will 
in time accomplish it. 

It is likewise possible, if not highly probable, that with the low 
cash reserves required of the member banks they will hold their 
secondary, as well as their larger, reserve in commercial paper ready 
for re-discount with the Federal Reserve banks in any emergency. 
They will therefore have no reason for the accumulation of gold and 
will be called upon, if necessary, by the Federal Board to pass over 
their gold to the reserve bank as preliminary to the re-discount for 
the new currency, as gold must be its 40% base. 

With the gold in the United States Treasury on deposit with the 
reserve banks, except the 150 millions required behind the legal 
tenders, it is easily conceivable that the federal reserve banks may 
become within a reasonable number of years the holders of substan- 
tially all the gold in the country, or say $1,600,000,000 gold out of 
the total $1,900,000,000 estimated to be in the United States. 
Against the hundred million of gold representing capital account they 
may issue, as stated above, 250 millions of notes, but against the 
balance, $1,500,000,000, which must come in by deposit, there must 
be a reserve of 35%, or 525 millions, which set aside from their total 
gold leaves $1,075,000,000 against which 2\ times this amount may 
be issued in new federal reserve currency with the maintenance of 
the 40% gold reserve. 

Now let it be observed right here that the 525 millions set aside 
against deposit liability need not be gold but may be in "lawful 
money," so that the balance sheet given below may be worked out 
with only $1,075,000,000 in gold, or with less than 60% of the gold 
in the country in the federal reserve banks. 

This $1,075,000,000 gold, free from deposit liability, permits 
issue, on a 40% gold reserve base, of $2,687,500,000 of federal reserve 
currency on the security of commercial bills. 

Unless there is the inflation of rising prices this would about 
cover all the bills that could on the present volume of business be 
gathered together and counted "strictly commercial." 



100 THE FEDERAL RESERVE ACT. 

In balance sheet form this estimate of maximum possibilities 
works out about as follows: 

Assets: Liabilities: 

Gold . . $1 ,600,000,000 Capital $100,000,000 

Discounts 2,687,500,000 Deposits 1,500,000,000 

New currency . . . 2,687,500,000 
$4,287,500,000 $4,287,500,000 

Deposit reserve 35% and in gold. Gold reserve against notes 40%. 
Total currency now afloat outside the banks $1,800,000,000. 

In the above theoretical figures it will be noticed that with 
the gold concentrated in the federal reserve banks we could export 
400 millions and still sustain about $2,500,000,000 of new currency 
by re-discounting most of the available existing commercial bills. 

Of the above $1,600,000,000 gold and "lawful money" $600,- 
000,000 can come in time from the national bank reserves. And 
$200,000,000 may come from the national government. To get in 
the other half (and one-half of this need not be gold but only "lawful 
money") to be held against deposit liability, requires the issue, in 
substitution, of either more national bank notes or federal reserve 
notes. 

Therefore, if the national bank notes are not increased in volume 
and we export our gold production, as is expected, the maximum of 
the new money on our present gold base, in the pockets of the people, 
can be only $1,887,500,000, as $800,000,000 must issue for the $800,- 
000,000 gold or "lawful money" to be acquired from the pockets of 
the people. 

A study of the above figures will show that the net possibility, 
with maintenance of reserves in the federal reserve banks, is an issue 
in the future of not more than two billions of additional currency. 

After the issue of enough federal reserve currency, in substitu- 
tion, for the gold and lawful money drawn into the federal reserve 
banks, this two billion should be kept as reserve money. 

The possible new currency issue, on the present gold monetary 
system, is far beyond any present capacity of the American people 
to absorb except by rising prices. 

Under our new tariff, rising prices for labor and materials to 
absorb such a volume of new currency should be an impossibility for 
many years, or until foreign wages and prices are first advanced. 
And our gold exports will tend to advance them. 

The declaration in the early articles of this series was that the 
Federal Reserve Act was comparable only to our Declaiation of 
Independence and the national Constitution. The Articles first 
binding the states together were deficient in the power to tax, and the 



THE FEDERAL RESERVE ACT. 101 

new Constitution gave the central authorities power to tax, individ- 
ually and collectively, property and persons, by every method 
except taxes on exports and taxes on incomes. 

The articles of federation in the national bank act having been 
fully demonstrated to be without power of centralization, rate regu- 
lation, regulated expansion or regulative contraction, the new bank- 
ing constitution remedies every defect to the fullest degree and in 
the most sweeping manner. Cash reserves are reduced to the mini- 
mum and under centralized control all reserves, both of reserve banks 
and national banks, may be suspended and the power to issue paper 
where paper was declared to be wanted, in commercial transactions, 
is so broad as to give the people a possible new currency that on the 
existing gold can double the volume of currency of all kinds now in 
the pockets of the people. 

Let it ever be remembered that as a hundred years ago, and ever 
since, and forever forward, the power to tax is the power to destroy. 
So likewise the power to expand credits and note issues without re- 
serves is the power to destroy whoever is found in bondage — the bond- 
age of debt or of labor. 



PART II. 

THE FEDERAL RESERVE DISTRICTS. 



FIRST DISTRICT— BOSTON. 



Boston Is Regioal Center For Six States, With Bankim; 
Power Exceeding $3,000,000,000, 13% Of Nation's. 



Highly Specialized Fields of Trade and Manufacturing Draw Heavily 

for Raw Material from Other Banking Districts — Manufactories 

of These States Have a Weekly Payroll of About $10 ,000 ,000 . 



Federal reserve district Number One, on the organization com- 
mittee's map, includes the six New England states for which Boston 
is made the regional center. 

This role of headship is not exactly new. Nearly one hundred 
years ago, when in 1818 the famous Suffolk banking regime was 
established, Boston became the center of a system more nearly like 
the Federal reserve system of today, in some essential respects, 
than anything that has existed since. Both alike involve the ex- 
pedient of dividing the country into geographical areas on the basis 
of the capacity for co-operation among banks with the main purpose 
of developing the resources of the district. 

All other systems in the one hundred and twenty-five years of 
our financial history proceeded either from the federalizing stand- 
point of a great central institution or from the local viewpoint of 
making each state a self-sufficing banking unit. 

The district's flow of banking credits as measured by its clear- 
ings entitles it to rank third in the returns from 128 cities men- 
tioned in Dun's Review for 1913. On the average New England's 
clearings total $10,000,000,000 in a grand total of nearly $170,000,- 
000,000 for the United States. The banking power of this group 
exceeds $3,000,000,000, or about 13% of the country's banking power 
of $23,181,000,000. 

New England's national banking operations lie well within its 
own borders, although it has enormous investments elsewhere. This 
appears from the following table of the total loans and discounts of 



THE FEDERAL RESERVE ACT. 103 

the national banks of three leading cities on January 13, 1914, as 
compiled by the Comptroller of the Currency: 

(000 omitted.) 

Total Within Outside 

N.B. Loans N.E. States N. E. States- 

Boston $190,973 $145,411 (76.14%) $45,552 (23.86%) 

Providence 25,032 15,442(61.69%) 9,590(38.31%) 

Hartford 21,202 16,019(75.55%) 4,183(24.45%) 

It appears that out of loans and discounts of $190,973,000 by 
the national banks of Boston, 76.14%, or $145,411,000, were made in 
the New England states. Of the other states the eastern group 
borrowed from Boston national banks 9.5%, the South 2.5%, the 
middle West 10.33% and the western and Pacific states 0.74% and 
0.79% respectively. Outside of its own regional borders New Eng- 
land national banks are largest lenders to the middle West, of which 
Chicago is the financial center. 

New England as a banking unit stands quite alone in the degree 
to which many of its enterprises have been developed. It is easily 
the most highly specialized in the fields of commerce, of manufactur- 
ing industries and of investing capacity. 

Its coastline of 600 miles, with its numerous harbors and rivers, 
has given its life a maritime character. No other Atlantic coast 
district is so largely identified with deep-water fisheries. From the 
South alone New England purchases little less than $200,000,000 
worth of raw cotton a year, practically all of which is seaborne 
traffic. Its lumber fleet of sailing ships is a feature of the 
coasting trade between the Maine lumbering ports and the 
middle Atlantic ports. Its inland traffic over little more than 8000 
miles of rail lines serves its industries by the delivery of raw material 
and fuel and the handling of its finished products. 

The gross value of the products of its manufactures is now esti- 
mated at $2,500,000,000 a year, representing an investment of $2,- 
300,000,000 and a wage payment of fully $550,000,000 a year. The 
pay envelopes of New England's manufactories contain an average 
of more than $10,000,000 each week. 

One of this district's heaviest annual outlays is for fuel supplies. 
It draws largely for its gas-making coal from maritime Canada. A 
large part of the 44,000,000 tons or more of domestic coal shipped 
from the five North Atlantic ports finds its way into New England. 
Many more millions of dollars are paid annually for grain, animal 
products and other produce generally brought from the West or the 
South to supply its 7,000,000 people. 



104 THE FEDERAL RESERVE ACT. 

These six states have to finance a foreign trade of $240,000,000 
a year. Besides this Boston and Portland are ports of exit and entry 
for much of Canada's external commerce, especially during the winter 
months when navigation is partially suspended at St. Lawrence ports. 
New England's commercial relations with the Dominion and the 
maritime provinces are more intimate than those of any other portion 
of the Union, excepting possibly the Minneapolis- Winnipeg trade. 

One source of banking power in which this district ranks high 
is in its sayings deposits. Out of a total of 10,060,304 depositors in 
the United States in savings banks on June 4, 1913, New England 
had 3,464,083, or over one-third. The funds placed to their credit 
in 413 banks were $1,489,835,704, averaging $417.07 for each de- 
positor. This is the home of the mutual savings banks, 404 of which 
out of 623 of this type in the country are located in New England, 
whose depositors had $1,483,127,489 in their names. Although rank- 
ing among the smallest of the twelve regional districts, its banking 
agencies are widely diffused, there being within this territory more 
than 100 towns and cities of 10,000 or more inhabitants. 



SECOND DISTRICT— NEW YORK. 



A Reserve Bank With Resources Commensurate With New 
York As A Money Market Too Large. 



Organization Committee Took the Middle Course — Out of a Sub- 
scribed Capital of $107,147,000 by 7475 Assenting Banks, 478 
Within New York Bounds Have a Regional Bank with 
$20,621,000 Capital. 



In the organization of the New York Reserve district the loca- 
tion of its regional center was a foregone conclusion. How large the 
district so centered should be was a financial rather than a geographi- 
cal problem. A Federal reserve bank, having resources commen- 
surate with the rank of New York as a national and international 
money market, would not only have overshadowed other reserve 
banks, but might have tended unduly to reduce their number and 
intensify their inequality. 

Too small a reserve bank in New York would have handicapped 
it in competition with other institutions within or without the Federal 
system. The Organization Committee took the middle course. 
Out of a subscribed capital of $107,147,000 by 7475 assenting banks, 
the 478 within the bounds of New York state are authorized to share 
in the creation of a regional institution with a capital of $20,621,000. 
This is nearly one-fifth of the available capital resources for all the 
assenting banks of the country. 

New York City, as a consequence in part of this districting, has 
three distinct financial functions. First, it is the leading port of the 
western world in the value of its foreign commerce. Its financing 
in foreign exchange is much larger than these values indicate, because 
most other ports do their foreign banking through New York. In 
its commercial capacity it pours over its wharves commodities in 
imports and exports valued at $1,966,000,000 annually, at the rate 
of $7,000,000 in trade for every business day of the year. Secondly, 
it is the distributor of domestic credits and funds on a continental 
scale. Its banks' clearings averaged $98,000,000,000 of exchanges 



10G THE FEDERAL RESERVE ACT. 

in the past five years, or 59% of the total exchanges of all reporting 
cities. Its average daily clearings in 1913 were at the rate of more 
than a million a minute. Thirdly, its newest service is that of con- 
serving the state's national bank reserves and performing other func- 
tions within this territory. 

The basic banking facts about the New York district are tabu- 
lated below. They are compared with the corresponding facts for 
all districts and show the proportionate rank of leading resources 
involved in the division: 

N.Y. District All Districts % 

Number of banks 478 7,475 6.40 

Area, square miles 49,170 3,016,630 1.63 

Population 9,113,000 89,045,000 10.23 

Six per cent, sub $20,621,000 $107,147,000 19.20 

♦Cash in vaults 359,715,000 967,339,000 37.17 

Cap. and surplus 343,693,000 1,785,791,000 19.20 

♦Total deposits 2,061,858,000 8,676,121,000" 23.80 

♦Specie holdings 254,099,000 780,490,000 32.60 

♦Postal savings 1,037,489 22,243,089 4.67 

*Jan. 13, 1914. U. S., including Hawaii. Others March 4, 
1914. 

One of the most striking features in this contrast is the fact 
that the New York district has in its custody 37.17% of the cash in 
the vaults of all assenting banks in the country. Equally striking 
is the possession of a quarter of a billion of specie holdings, making 
32.6% of this class of assets of the national banks of the country. 
Nearly a quarter of the total deposits in national banks were con- 
centrated here on March 4. These facts suffice to disclose the pre- 
ponderant position of the nation's chief commercial and financial 
center. 

As a holder of specie, mainly gold and certificates, New York 
national banks carry somewhat less than all the other 49 reserve cities 
combined. On Jan. 13, 1914, New York city had $254,099,235 in 
this form, against $305,559,597 in all other reserve cities. Of the 
combined specie holdings of all reserve cities, equaling $559,658,832, 
this single center carried in its national bank vaults 45.4%. 

Regarded as a reserve district, New York state is among the 
most favored. The great port at the mouth of the Hudson is knit 
into the district's trade, agriculture and manufacturing by 100 years 
of constructive policy pursued along the radiating lines of its rivers, 
its canals and its trunk line railways. Lying between the seas on 
the East and the Great Lakes and the greater prairie commonwealths 
on the West, it holds within its limits fully 10,000,000 people, of 



THE FEDERAL RESERVE ACT. 107 

whom 8,000,000 are urban and 2,000,000 are rural in their occupa- 
tions. 

The regional reserve bank of New York must, of course, have 
primary regard to its legally defined functions within its own district. 
Yet these cannot help being affected constantly by the wider rela- 
tions which connect it as a money market with the agricultural, the 
commercial, the industrial and the financial structure of the nation's 
and the world's business systems. 

There are five important seasonal swings in this market, each 
of which reflects some distinct development in the progress of the 
production or movement of the crops. With each movement of 
farm produce there is a counter-movement of cash and credit, fol- 
lowed by a third movement of merchandise represented in the ex- 
penditures of the purchasing power of the crops sold. 

America's main connections by travel and trade with other 
countries lie through this territory. As a transit-way between the 
East and the West, the New York district occupies strategic ground. 
The east-and-west trunk lines originating north of Philadelphia 
and south of the St. Lawrence traverse this district. The state it- 
self has a railway mileage greater than that of all New England. 
No state has more intimately co-ordinated its rural and industrial 
towns with its main financial and commercial center. This reserve 
district serves its industrial markets with the products of farm, or- 
chard and vineyard, including a dairy industry whose 3000 establish- 
ments have a yearly product of nearly $60,000,000. 

By this time the state's manufacturing capital is, on Census 
basis, $2,500,000,000 and its annual output more than $3,000,000,- 
000. Leading all other states in commerce and industry in points of 
total values, it is also the absorber of the largest tide of human 
migration anywhere recorded in the wanderings of the race. Last 
year this state received one-third of a million of immigrants into its 
population from alien lands. 

In its larger relations this district, and especially its regional 
center, plays parts of world-wide scope in the investment and specu- 
lative work of finance. Chief of these is the underwriting and mar- 
keting of the stocks and bonds and notes issued in the course of each 
year. 

When monetary stringency arises in Europe from war-scare, 
over-trading or other causes, the liquidation of tens of millions of 
American securities records its main impact on the New York se- 
curity market. The capacity of this market to meet such a situation 
makes of it an international shock-absorber of the first magnitude. 
Competent authorities estimate that in the European liquidation of 



108 THE FEDERAL RESERVE ACT. 

securities in the past two years from $250,000,000 to $300,000,000 
have been disposed of, largely through the New York market- 
New York performs still another financial service not usually 
recognized at its real worth. The seasoning of securities, bought at 
issue and held until the investing public creates a demand for them, 
is one of the main services of its great financial institutions. As an 
international gold market the country's combined imports and ex- 
ports in the year ending with April, 1914, were $128,837,700, of 
which practically all passed through the port of New York. 



THIRD DISTRICT— PHILADELPHIA. 



Compact Banking Territory With Commanding Central In- 
stitution Within Daily Reach Of Assenting Banks. 



Economic Life Includes Best Farm Life on the Continent, Many 

Industries Older Than the Nation, Mining of 100,000,000 Tons 

of Coal a Year, and an Annual Wage Scale of Over $500,000,000. 



Philadelphia reserve district is the first in which the Organiza- 
tion Committee departed from state lines in making up the regional 
bank territories. The western third of Pennsylvania, on topo- 
graphical grounds and in some respects from business relations, be- 
longs rather to the trans-mountain district than to the Atlantic sea- 
board region. That part of Pennsylvania lost to the Philadelphia 
district is responsible largely for this being the smallest among the 
twelve. As it stands, embracing all of New Jersey and Delaware 
as well as the eastern two-thirds of Pennsylvania, it has an area of 
39,865 square miles, including 8,110,000 people, 800 national banks 
and a reserve subscription of $12,980,000. 

An institution of such capitalization outranks in this respect 
any other in the third district. Philadelphia's largest national bank 
has a capital of $3,000,000 and its largest trust company one of $2,- 
500,000. The position of the regional bank among others in this 
field is far more commanding in rank on this account than in New 
York. 

Philadelphia's reserve bank stands next to New York in capi- 
talization. It slightly exceeds the amount of money Chicago will 
have to subscribe from a larger number of assenting banks, for a 
larger population by 4,520,000 and for a territory more than four 
times the area of district No. 3. 

Compactness of territory is a characteristic of this district. No 
part of it is much more than 200 miles from the regional center. 
This makes it feasible to send and receive communication from 
many places along the main transportation lines within the same busi- 
ness day in banking hours. At the most a 24-hour limit is all that 
is needed for an interchange of correspondence between Philadelphia 
and its regional members. 



110 THE FEDERAL RESERVE ACT. 

Banking within this region has found intensive development 
both in the northern and southern directions. Philadelphia's wider 
connections arc on east and west lines. Its national banks bave 
little to do with the southern states and less with the eastern. The 
former group afforded a field for 4.27% of all national bank loans 
and discounts as held on January 13, 1914. New England at that 
time held only 1.73% of such funds, compared with 7.29% by the 
middle western states and 86.14% by the eastern states, including 
New York, Maryland and the District of Columbia as well as New 
Jersey and Pennsylvania. 

This district is one of the few in the East in which agriculture r 
manufacturing and mining are each highly developed. That makes 
a closely complemental banking service possible. The rotation 
system of farming in New Jersey, Pennsylvania and Delaware is the 
gift of England and Germany from Colonial times. These states base 
farming on the maintenance of fertility of the soil and variation in 
product, making improved farm lands the surety for long-term loans. 
Of Pennsylvania's 225,000 farms, 166,000, or 74% of them are culti- 
vated by their owners. Credit among such communities of farmers 
ranks high. Risks are low. The size of the farm is determined 
ultimately by the size of the family, by the co-operation of whose 
members it is cultivated. Financially independent farms owned and 
operated by their proprietors lie at the basis of the economic life of 
this district. Its many rural towns and villages, its numerous indus- 
trial enterprises and its vast wealth dug from quarry and mine give 
the third district a peculiar degree of balance which comes only 
from a many-sided business community. 

America's coal mining industry had its rise in this district in 
northeastern Pennsylvania, where nearly 82,000,000 net tons are now 
produced yearly and marketed. Transportation of coal to the sea- 
board is a large part of the traffic of this region. Adding the bitumin- 
ous mine output west of the Susquehanna but cast of the Cleveland 
district line, the total coal tonnage mined and moved each year in 
this reserve region is not under 100,000,000 net tons. 

From the Lehigh Valley mines came the first anthracite coal 
to be used for producing steam power. Here one finds well-estab- 
lished industries resting on many varieties of skill. Philadelphia is 
still the foremost textile center of America. Five years ago it pro- 
duced nearly one-tenth of all the textiles of the United States, or 
more than any two other cities combined, and the value of its textile 
product, $153,000,000 in 1909, exceeds that of any other city in 
the world (Walton). Philadelphia district produces 26% of the 
country's total output of hosiery and knit goods. This district's- 



THE FEDERAL RESERVE ACT. Ill 

manufacturing includes 40,000 establishments, 1,000,000 wage- 
earners and a payment of $500,000,000 a year in wages. Its carpet 
industry, and many of Pennsylvania's iron industries, are older than 
tin- nation itself. 



FOURTH DISTRICT— CLEVELAND. 



Vast Natural Resources, Inland Systems Of Navigation, 
And Leadership In Iron And Steel Are Features. 



Comparative Banking Resources of Four Leading Cities — World's 

Primacy as a Freight Center in Pittsburgh Tonnage Belongs to 

This District — Timbers of Ohio Valley, Natural Gas and 

Coal. 



Of the thirty-seven cities which aspired to be designated as 
Federal reserve centers, five are within the Cleveland district. The 
territory includes the whole of the state of Ohio, the western third of 
Pennsylvania and somewhat less than the eastern half of Kentucky, 
with a small segment of West Virginia. 

The district of which Cleveland is the regional reserve city is 
remarkable for its vast natural resources of coal deposits, for its 
river and lake navigation systems, for an enormous development of 
the iron and steel industry at such localities as Cleveland and Pitts- 
burgh, and for the possession of an unusually large number of in- 
dustrial cities and towns. 

In the size of capital available for reserve banks from the 6% 
subscription on capital and surplus, Cleveland ranks fourth, being 
preceded by New York, Philadelphia and Chicago. This investment 
is the contribution of 724 banks. In the order of the number of sub- 
scribing banks the district ranks fifth. The four cities of Cleveland, 
Cincinnati, Pittsburgh and Columbus, included in this area of 84,- 
000 square miles, showed loans and discounts on March 4, 1914, of 
$260,088,511. Of this total Pittsburgh alone represented $124,- 
568,231, compared with Cleveland's $62,588,735. How these four 
main financial, industrial and commercial centers compare in bank- 
ing resources is evident from the following comparison: 

Nat.Bks. Cap.&Sur. Indiv. Dep. Loans & Disc. 

Pittsburgh 21 $46,714,000 $120,260,088 $124,568,231 

Cincinnati 8 20,350,000 39,154,843 55,761,638 

Columbus 8 4,685,500 21,853,183 17,169,907 

Cleveland 7 14,400,000 40,479,025 62,588,735 

Total 44 86,149,500 221,747,139 260,088,511 

Within the past ten years Cleveland's resources show a growth 



THE FEDERAL RESERVE ACT. 113 

of 24% in the loans and discounts of the national banks alone. The 
financial development of the district has been closely identified with 
mineral production, including the Connellsville coal and coke dis- 
tricts, the upper lake iron ore district and the land and water trans- 
portation facilities in their relations with manufacturing and ag- 
riculture. 

Xo other part of the world presents traffic operations on a more 
colossal scale than some of the leading centers in the Cleveland dis- 
trict. For example, the total freight tonnage shipped into and out of 
Pittsburgh by railway alone, not including tonnage simply passing 
through, is 165,000,000 tons a year. This leaves out of account the 
vast coal tonnage barged south on the Ohio. It includes the control 
of the ore-carrying trade of the lakes from Cleveland as the chief 
port for about 80% of the 50,000,000 tons in each annual movement. 

The financial needs of the chief industries of this district are well 
distributed over a large part of the year, according to Cleveland's 
brief to the Reserve Bank Organization Committee. Commodities 
handled by Cleveland business houses are there valued for iron ore 
at $64,000,000 a year, bituminous coal at $56,000,000, petroleum 
and its products $33,500,000, primary iron and steel products $36,- 
000,000, foundry and machine shop products $48,000,000 and auto- 
mobiles and parts at $43,000,000. 

Outside of this district its manufacturing industries are closely 
dependent for raw material on the Minnesota and Michigan ore de- 
posit and lumber supplies. This gives its main manufacturing en- 
terprises the benefit of one of the cheapest freight hauls in the world 
by way of the Great Lakes. On the south the timber districts of 
West Virginia and Kentucky are partly within and partly without 
this regional territory. But the well known woodworking industries 
of Cincinnati and other centers rely largely on hardwoods derived 
from the headwaters of the Ohio river basin. The natural gas of 
West Virginia is freely piped into western Pennsylvania and Ohio for 
manufacturing, and West Virginia coal finds outlet in the same direc- 
tion. 

The heaviest pig iron production in the country occurs in the 
Pittsburgh district. In many respects the fourth reserve district 
is peculiarly favored in its facilities by communication by land and 
water. Across the territory between the Ohio river and the lakes 
nearly every trunk line originating on the north Atlantic seaboard has 
its right of way. Between the lake shore and the river the canal and 
rail lines connect the centers of population, distribute raw materials, 
serve its manufacturing industries with semi-finished supplies and 
contribute the finished products for consumption. Not the least 



114 THE FEDERAL RESERVE ACT. 

important feature of the district is an agriculture of a superior order 
for which the many cities and towns afford local markets in contrast 
with the more easterly districts depending on distant sources of 
production. 

Here interurban electric lines have enjoyed an advanced state 
of development. 

So varied an economic life as is here found must necessarily 
limit its banking operations in the main to the fields of near-by states. 
Out of a total of loans and discounts issued by Cleveland, amounting 
to $60,763,000 at the beginning of 1914, 92.66% were placed within 
the middle western states, and 5.87% in the eastern states. Cin- 
cinnati with $52,290,000 of this class of assets placed 87.40% within 
the same group and 4.10% in the East. If the wealth of the district 
be measured by capital and surplus of its national banks assenting 
to the reserve system, the total of $192,147,000 causes it to rank 
fourth among the twelve regional banks with only that of New York, 
Philadelphia and Chicago ahead of it. 



FIFTH DISTRICT— RICHMOND. 



Five Atlantic Slope States Centralize Reserve Operations 
At The North-To- South Focus Of Trade. 



This Territory's Financing Serves the Oldest of Farming Industries 
in Cotton and Tobacco Production — Forests of Hardwoods and 
Mines of Coal in Mountain Sections — H ydro-Electric Power 
Resources. 



The fifth Federal reserve district, comprising substantially the 
five states of Maryland, West Virginia, Virginia, North Carolina 
and South Carolina, is grouped on the whole with regard to the lines 
of business movement. The present trend of business shows the 
current of exchange to run along two main axes. The primary 
axis follows the north and south lines and the secondary axis includes 
the east and west trend of business. 

Richmond, the regional center, stands at the head of inland 
navigation in this region, especially for the coasting trade. Here the 
north and south trunk lines come to a focus, following the line thence 
to Washington, which is still the main easterly gateway between 
north and south on the Atlantic slope. 

Considerations which led the Organization Committee to de- 
termine upon Richmond as the most available point for centralizing 
the reserve operations of the upper district in the south Atlantic 
states are given in the committee's statement, dated April 10, as 
follows: "South Carolina and North Carolina had protested against 
being connected with a bank to the south or west. They said their 
own course of trade was northeast. It seemed undesirable to place 
a bank in the extreme northeastern corner, or at Baltimore, not only 
because of its proximity to Philadelphia, but also because the in- 
dustrial and banking relations of the greater part of the district were 
more intimate with Richmond than with either Washington or Bal- 
timore." 

A peculiarity of this grouping of financial resources is the 
presence, within comparatively short distances, of three such finan- 
cial centers as Richmond, Washington and Baltimore. Their bank- 



116 THE FEDERAL RESERVE ACT. 

ing strength, as indicated by the number of national banks and other 
essential features, is compared below for a ten-year period: 

Richmond Baltimore Washington 

National banks 1913 8" 16 11 

1903 5 '19 11 

Inc. or decrease 3 3 

Capital and surplus ....1913 $9,484,000 $19,760,000 $11,165,000 
1903 2,970,000 18,926,000 6,102,000 

Increase percent 220% 4.4% 83% 

Loans and discounts 1913 34,732,000 63,703,000 26,834,000 
1903 11,372,000 47,222,000 14,343,000 

Increase per cent 207% 35% 89* J 

Individual deposits 1913 24,391,000 44,547,000 26,319,000 
1903 9,668,000 32,191,000 18,699,000 

Increase percent 152% 38% 40% 

From the standpoint of the number of national banks assenting, 
the Richmond district stands on a par with New York. Its 475 
national banks have a capital and surplus of $105,064,000. That 
entitles it to a central reserve institution with an investment of $6,- 
303,000, or nearly half as large as the capitalization of the Phila- 
delphia institution and less than one-third that of the central bank 
of New York. 

This district is the first in order from north to south to include 
agricultural operations of a different class from those common to the 
New England and the middle Atlantic states. Here banking enters 
the cotton territory. Approximately 4,500,000 acres of cotton be- 
long to this south Atlantic banking zone. Its area of 173,000 square 
miles is larger than the combined area of the first three reserve dis- 
tricts. In population the total of 8,519,000 outranks all other dis- 
tricts, excepting only New York and Chicago. 

District No. 5 is a particularly strong one in natural resources. 
Its large agricultural acreage is still expanding in two of the oldest 
farming industries — cotton and tobacco growing. These areas have 
in soil and seasonal conditions somewhat of a natural monopoly for 
the peculiar variety of crops, including early vegetable and fruit 
production. On the west lie the mineral resources of Virginia, West 
Virginia and Maryland. The forests of these states and the Caro- 
linas, including hardwoods and pines, constitute primary sources of 
wealth insuring an extended future to the economic activities de- 
pending upon such supplies. It is not generally known that in 
furniture production the North Carolina towns lead all other 
sections of the country. 

Among the natural advantages which give this district a high 



THE FEDERAL RESERVE ACT. 117 

place are the mineral resources of West Virginia. In 1912 the 
United States Geological Survey valued the total production of this 
state's mineral wealth at $123,872,000. Since 1906 the state has 
piped out into adjacent states 650,500,000,000 feet of gas out of 
1,138,000,000,000 produced. The state's production of oil annually 
is 12,000,000 barrels and its coal output is 61,770,000 tons. De- 
posits of brown hematite iron ores estimated at 185,000,000 tons. 
Iron and steel manufactures for the state, including the northern 
point in the Cleveland district, are estimated at $40,000,000. In 
the Fairmount region alone 3,500,000,000 tons of Pittsburgh coal are 
available for coking purposes. The coal measures, embracing an area 
of 17,000 square miles, are estimated to contain 230,000,000,000 
tons. 



SIXTH DISTRICT— ATLANTA. 



Chief Distributing Center Of Southeastern States Serves 
Area Of 233,000 Square Miles, And 372 Banks. 



Climatic Features and Natural Resources Grouped in Complemental 

Relation to Distribute Burden of Financial Requirements 

Through Successive Seasons — Purchasing Power of the 

Area is Enormous. 



Atlanta district makes the fifth fronting on the Atlantic sea- 
board. Although one of the largest in total area, it is the smallest 
in the number of national banks included. District Number Six, 
with Atlanta as a center, comprises 233,000 square miles, and is the 
largest federal reserve region east of the Mississippi. The assenting 
institutions, numbering 372 national banks, have the smallest capi- 
tal and surplus among the twelve, and likewise the smallest subscrip- 
tion to any regional reserve bank. The 6% quota will give the new 
institution a capital of $4,641,000, comparing with $6,303,000 for 
Richmond, and $5,520,000 for Dallas, in adjacent districts. 

Some of the heaviest timbered forest lands in the East are to be 
found in the mountain sections of this group of states. In the north- 
ern portion of the district the Appalachian range reaches its highest 
elevation, and the hardwood forests found there constitute the 
source of many of the leading steams which flow east to the Atlantic, 
and south to the Gulf. Probably no other eastern district is better 
supplied with rivers along whose banks densely growing timbers 
abound. These streams likewise are the sources of hydro-electric 
power, whose development has gone far enough to show that in due 
time a new industrial order is destined to be built upon this basic 
feature. 

Climatic advantages and favored conditions in the supply of 
food and raw materials strike a fortunate balance here between the 
shorter seasons of the North and the debilitating heat of tropical 
latitudes. The Atlanta district enjoys the longest coastline, with 
the exception of the Pacific coast region, and the largest number of 
harbors known to commerce. None of its business localities are more 
than four hundred miles from the seaboard. That is practically the 
distance between Atlanta and New Orleans, rrom Atlanta to Nash- 



THE FEDERAL RESERVE ACT. 119 

ville, the leading distributing market is Tennessee, the distance is 
about two hundred miles, in a direct line. Southern Florida, in 
which Key West is the remotest point, is seven hundred miles from 
its regional banking center. 

Between this last-named point, where cigar manufacturing 
has attained to large proportions as an industry, and the Cumberland 
Gap on the northern border, there is an unusually wide gamut of 
financial services. Through the fifteen or more harbors, the district 
has a foreign trade of $334,000,000 a year. Savannah, in the east, 
is the second or third largest cotton exporting port in the South, 
sharing the rank by turns with New Orleans. 

From Florida ports on the Gulf, coal and phosphate are shipped 
in large quantities to foreign lands. Lumber and cotton and cotton- 
seed products are handled largely through the Gulf ports of Florida, 
Alabama, Mississippi, and Louisiana. Tropical fruits enter the 
country in immense quantities through Mobile and other ports. 
And New Orleans is the principal distributing point for Brazilian 
coffee over a great part of the Mississippi valley. 

The cotton yield of these states, of which there are about 12,- 
000,000 acres out of a total for the entire belt of 37,000,000, is con- 
servatively estimated at $325,000,000, or five times that of the min- 
eral wealth of these states in 1912. Pro-rating the mineral production 
of the four states and portions of the states, the total for the year 
mentioned, according to the United States Geological Survey, 
amounted to $67,000,000. The mining industry of Alabama alone 
in the last-named year was placed at $30,641,000. 

The purchasing power of this district, as measured by the mer- 
chandise movements, is high. Sales of farm products during the 
summer and early winter months entail an enormous volume of dis- 
tributive operations from the jobbing centers of the North and West, 
through the commercial towns and cities of these states. The 
mercantile demand for funds in this distribution reaches its height 
just before the final quarter of the calendar year, when the harvesting 
of the season is begun, and farming operations liquidate their loans. 

Adequacy of banking resources depends much on whether the 
demands for accommodations are divided more or less evenly among 
succeeding quarters of the year or are concentrated upon the different 
kinds of enterprises within a comparatively short portion of the year. 
The Atlanta district was presumably planned with regard to the 
former demands on banking resources by its industries. 

The seasonal use of funds here reaches its height in one section 
and begins to be liquidated before the burden of demand for cash and 
credit reaches the other section in the succession of agricultural 



120 THE FEDERAL RESERVE ACT. 

crops. Among the mining and manufacturing districts, including 
lumbering and the production of fertilizers, the burden usually falls 
upon the banks at the opposite side of the year from the time when 
the agricultural demands are at their widest and heaviest. 

Atlanta district contains approximately 2000 banks, including 
national, state, savings and private banks, and loan and trust com- 
panies. Outside of the Federal reserve system in which 372 banks 
are included, there are nearly twice the number of banking institu- 
tions found in New England in this southeastern district. Banks 
in these states had loans and discounts on a given date, as reported 
by the Comptroller of the Currency, of $425,000,000, or one-fourth 
of all assets of this kind in the thirteen southern states. 

The twenty-one national banks in six of the leading cities of the 
district compare as follows in the main features of their assets: 

Nat.Bks. Cap.&Surp. Indiv.Dep. Ls.&Dis. 
Atlanta .... 6 $8,600,000 $24,348,912 $26,038,731 

Savannah... 2 1,600,000 1,443,161 3,244,938 

Birmingham 2 3,300,000 9,995,561 10,449,274 

Montgomery 4 2,515,000 6,115,197 5,658,213 

Chattanooga 3 2,975,000 10,109,930 11,565,519 

New Orleans 4 6,730,000 16,857,832 17,285,254 

Much of the traffic of the Atlanta district follows gravity lines. 
This gives to the seaboard markets a financial importance in domestic 
trade and in exporting activity. 

The financial operations attending this commerce do not always 
follow the lines of commercial transportation. Exports of cotton 
through Savannah and New Orleans, of coal through Pensacola and 
of lumber and phosphates through gulf and ocean ports are financed 
by originating centers through New York. 

It is a characteristic of this region that much of its annual pro- 
duction in coal, timber and iron and steel as well as cotton seeks 
points of consumption outside of the district. Another feature is 
the large demand for foodstuffs and merchandise which the vast 
wealth created here makes on the manufacturing industries and the 
agricultural production of the north and the west. 



SEVENTH DISTRICT— CHICAGO. 



Chicago Is Commercial, Financial And Industrial Focus In 
The Group Of Regional Centers In Middle West. 



Agriculture of Several Prairie States at Basis of a Jobbing Trade of 
$2,000,000,000 — District Served by 38 Railway Lines Terminat- 
ing in Reserve City, the Headquarters for Enormous 
Manufacturing Output. 



Both in the number of banks represented and in the population 
embraced within its territory the Chicago district leads all others. 
Subscribing banks in the seventh district number 984, or nearly as 
many as the total number of all kinds of banks in New England and 
more than the total subscribing national banks in both the New Eng- 
land and the New York districts. 

The capital and surplus represented in this group amounting to 
$211,068,000 provide for one of the strongest Federal institutions 
with a capital of $12,664,000. There are in addition to the national 
banks mentioned 15 state banks and trust companies which bring 
the capital of the Federal Reserve Bank up to $13,152,000, making 
the Chicago regional bank next to New York in point of capitaliza- 
tion. 

Territory covered by this grouping of 173,818 square miles in- 
cludes the lower peninsula of Michigan, Iowa, three-quarters of 
Indiana, the northern three-fifths of Illinois and the southern quarter 
of Wisconsin. Considering Chicago's commercial eminence and the 
numerous agricultural and manufacturing sections which clear 
through the banks of this city, the district as assigned by the organiza- 
tion Committee seems rather restricted. This is due to the proximity 
of four other industrial commercial centers, each of which serves a 
tributary territory not easily provided for under any other arrange- 
ment. 

A glance at the map shows, however, that the centrality of 
Chicago's position has been recognized rather than disregarded. As 
a banking center Chicago is the focus of the grouping of the four other 
regional districts which cluster in a semi-circle around the great lakes. 
Eastward lies the Cleveland district, to the southwest St. Louis and 



122 THE FEDERAL RESERVE ACT. 

Kansas City and to the northwest Minneapolis. Together they 
form a semicircle of regional reserve banks. 

Chicago district stands in a unique relation to the other districts 
of the middle West. As one of the three central reserve cities Chicago 
still provides the main specie basis for the credit structure on which 
the vast business of the interior rests. On January 13, this year, 
there were held there $61,559,491 in specie against $18,291,214 at 
St. Louis and $19,902,807 at Pittsburgh, the two other next largest 
reserves outside of seaboard cities. 

This district's financial position among the other four of the 
middle West is compared in essential features in the following table: 

Banks Cap. &Surp. 6% Sub. 

Chicago 984 $211,068,338 $12,664,100 

Cleveland 724 192,147,288 11,528,835 

St. Louis 434 80,717,981 4,843,079 

Kansas City 835 93,065,912 5,583,956 

Minneapolis 687 78,381,081 4,702,865 

Total, five districts 3,664 655,380,600 39,322,835 

Total, 12 districts 7,475 1,785,791,171 107,147,470 

Per cent., five districts 49 36.6 36.7 

Nearly one-third of the entire capital and surplus in these five 
districts belongs to the 984 banks in the Chicago territory. 

More than one-fourth of the 3664 national banks in the five 
middle western regions are grouped with the primary market at the 
southern head of the Great Lakes. 

Nearly one-third of the 6% subscriptions to the reserve banks, 
or $12,664,100 out of $39,322,835 in the five districts, is centered in 
the new Chicago institution. 

Taking these five districts as a unit, they contain 49% of all the 
7475 assenting banks, have 36.6% of all the capital and surplus and 
they subscribe 36.7% of the banking capital towards the new system. 

Chicago's selection as a reserve center was a foregone conclusion. 
Her location at the south end of lake navigation where 38 railroads 
terminate makes this the main distributive focus of the middle West. 
The city is terminus for 42% of the railway mileage of the United 
States. It has clearing yards for traffic with a capacity of 40,000 
freight cars a day. The port has 96 miles of waterfront and 20 miles 
of docks and wharves, all of which go to make up the equipment of an 
emporium of trade whose annual financing runs up into billions. 

The jobbing trade of Chicago was estimated by the Chicago 
Association of Commerce in 1912 at $2,000,000,000. In the manu- 
facturing fields the packing-house industry alone in 1910 had a pro- 
duction of $400,000,000. Foundry products were figured at $105,- 



THE FEDERAL RESERVE ACT. 123 

000,000 and agricultural implements at $100,000,000. The annual 
output of iron and steel products was last year estimated at $222,- 
000,000, made largely from iron ores brought by the la-Ices for a 
distance of 350 miles. The manufacturing output of all kinds, as- 
certained to be $1,300,000,000 in 1910, must by this time have in- 
creased to $1,500,000,000. 

The total number of banks within the city itself is 175, including 
national, state and private. These have deposits exceeding $1,002,- 
000,000 and the clearings in 1913 were $16,073,000,000. The total 
deposits of the Federal reserve district, of which Chicago is the cen- 
ter, were officially reported on March 4, 1914, at $1,300,691,995, 
making an average of $103 per capita. This applies to national 
banks alone. Within the past ten years capital invested and surplus 
accrued in national banks in the city increased 79%, although the 
number of national banks included in this count decreased from 12 
to 9. Loans and discounts rose in this period between 1903 and 1913 
from $181,416,000 to $329,024,000, an increase of $417,608,000, or 
81%, coincident with an increase of 62% in individual deposits. 

The states assigned to the Chicago district include Illinois and 
Iowa, rival leaders in corn production. The agricultural authorities 
of no other states have devoted more attention to the improvement 
of yields of that staple, and no other states have so large a production. 
In the three states of Indiana, Illinois and Iowa one-third of the 
total corn growth of the United States and one-fourth of the total 
production of the world were grown in 1912. Out of this yield of 
1,057,000,000 bushels, approximately two-thirds were retained on 
the farms, mainly for the feeding of livestock destined for the mar- 
kets of the cities of this district. 

The northern half of the corn belt is assigned to the regional 
banking area lying between the western boundry of Ohio and the 
Missouri river. Here farm lands have value ranging from $100 to 
$300 an acre. Such breeding on an extensive scale is conducted all 
over this territory. The finest specimens of beef cattle, dairying 
establishments by the thousands, and the rearing of draught ani- 
mals indicate the phases of the more advanced agriculture in which 
banking resources find intensive employment. 



EIGHTH DISTRICT— ST. LOUIS. 



This Regional Center Lies Nearest To Country's Center Of 
Population, In Heart Of Grain Belt. 



Great River Port Serves Commercially Convenient Territory of 
146,000 Square Miles, With 434 Assenting Institutions — 
Livestock Market Here has Handled 6,000,000 Head a 
Year — Hardware and Shoes. 



In several respects the St. Louis district is one of the most satis- 
factory to the business interests concerned. Geographically it 
embraces only trade territory which is primarily tributary to this 
market. That is true both of the merchandising trades and of the 
grain and livestock movements. It is not unduly large, being the 
smallest west of the Mississippi. Its extreme limits are about 500 
miles apart. It disregards state lines in favor of trade conditions. 
It includes all of Arkansas and parts of five other states. Twelve 
counties in the western part of Missouri are assigned to the Kansas 
City district. The major part of Missouri and adjacent sections of 
Illinois, Indiana, Kentucky, Tennessee and Mississippi go to make 
up an area of 146,474 square miles. This includes a population of 
6,737,000 persons. Of all the regional reserve centers, St. Louis lies 
nearest to the country's center of population. 

In the number of national banks figuring, this region stands near 
the foot of the column. Only 434 institutions had entered into the 
arrangement for the creation of a Federal Reserve Bank up to March 
4, 1914. The only reserve bank with a smaller number of institutions 
is that at Atlanta with 372 banks. In the adjacent district of 
Chicago there are 984 banks, of Kansas City 835, and 687 for Min- 
neapolis. Numerically viewed, St. Louis is among the smallest 
in membership, but this is to a great extent offset by compactness of 
business relations. 

Restriction in territory shows itself not only in the smaller 
number of banks, but also in the size of the reserve bank as based on 
capital and surplus. The only other district whose banks have a 
smaller total than this are Atlanta and Minneapolis. From re- 
sources of $80,717,981 the regional bank gets a capital out of 6% 
subscription of $4,843,079, making St. Louis tenth in the investment 
scale of the twelve regional banks. 



THE FEDERAL RESERVE ACT. 125 

The commercial geography of the St. Louis district is unique. 
It includes the very heart of our greatest interior river basin. The 
Missouri river with its 3100 miles in length and the Ohio river, drain- 
ing a rich area for a stretch of 950 miles, both empty into the Mis- 
sissippi, which forms the great waterway artery of the St. Louis dis- 
trict for a distance of 800 miles between North and South. 

Another feature of this district is its climatic position. Its 
northern half is so well adapted to the growth of the hardier cereals 
that both the wheat and the corn centers of the country lie within 
this area. The southern half contains much of the best cotton- 
growing country, including the long staple lands of the lower Mis- 
sissippi between Cairo and Vicksburg. For this staple Memphis, to 
the south in the same district, is headquarters. Through the latter 
market much of the superior staple cotton taken by the Carolina 
and Georgia mills is marketed. At the eastern end lies Louisville. 
Its tobacco trade is among the largest of its kind. 

A half dozen states grouped closely around St. Louis grow ordi- 
narily a billion bushels of wheat and corn. Receipts of grain at St. 
Louis in 1902, when the corn crop of the Southwest was more nearly 
normal than in the following year a partial failure, were 80,000,000 
bushels. The equipment of this terminal point includes 36 grain 
elevators with a terminal capacity exceeding 10,000,000 bushels. 
The flour mills there turn out 7500 bushels daily. 

Among the livestock markets St. Louis ranks third in receipts, 
ranging from 1,000,000 to 1,500,000 head of cattle, or approximately 
half as large a trade as that at Chicago. Receipts of all kinds of 
stock have run as high as 6,000,000 head at St. Louis and shipments 
from one-third to a quarter as large as receipts. Taking receipts 
and shipments together this market does a traffic business of about 
150,000 carloads of livestock a year. 

Mineral resources, both developed and undeveloped, abound 
within the limits of the states included in this territory. The lead 
and zinc producing properties in Missouri and Arkansas are generally 
financed from this reserve center. Coal properties in the states of 
Missouri and Arkansas as well as in Oklahoma enjoy much of their 
development through St. Louis financial institutions. The same is 
true of the mineral oil industry of the Southwest, with which the re- 
gional center is connected by trunk line railway systems and pipelines. 

Coal traffic in this district, as reflected in the receipts at St. 
Louis, is almost entirely a rail movement. Within the past five years 
the yearly supply, derived mainly from mines within a short distance 
of the city on the Illinois side of the river, has ranged from 7,654,000 
tons to 10,235,000 tons. These figures serve as an index to the in- 



126 THE FEDERAL RESERVE ACT. 

dustrial and other demands of a center of a district of nearly 7,000,- 
000 people. In coal requirements St. Louis is estimated as ranking 
among western cities after Chicago and Detroit, and by some as next 
to Chicago. St. Louis is largely interested in the operation of the 
coal mines of southern Illinois and western Kentucky. 

Although cotton is not largely handled by way of the St. Louis 
market, the growing and marketing of the crop in the more southern 
sections of the belt, both east and west of the Mississippi, is largely 
facilitated by advances in which St. Louis banks participate. In 
merchandising naturally the jobbing trade receives a high develop- 
ment where the produce of so rich a district is marketed. The sale 
of farm products on one of the most extensive scales is here repeated 
year after year, and these huge values are balanced mainly by mer- 
chandising movements in exchange. 

In the central West St. Louis stands alone in the primacy of 
its manufacturing industries, its hardware distribution and produc- 
tion and its service as the supply market for mules for cotton-growing 
lands. The East St. Louis stockyards, where the Missouri draught 
animals are marketed, has its business connections with the regional 
reserve center across the river. Among other industries to which 
attention should be called are those of the manufacture of chemicals, 
the making of railway and street cars and tobacco and wood-working. 
The clothing and fur industries require large investment and working 
capital. This is North America's first fur trade center. 

No part of the country occupies a more favorable position than 
this district in respect to railway facilities. The two states of Mis- 
souri and Arkansas have nearly 13,000 miles of railways. The net- 
work of lines running in all the main directions keeps this section in 
close commercial relations with the main points of importance in the 
central Mississippi valley. St. Louis has the advantage of a cen- 
tralized railroad terminal to the substantial gain of commercial in- 
terests. 

Regarded as a banking center, the regional home of the reserve 
bank has seven national banks, 44 state and trust companies and 59 
private banks. St. Louis is one of the three central reserve cities of 
the country in the national banking system, sharing its position with 
New York and Chicago. It has one financial institution, a national 
bank, with a capital of $10,000,000, which is the only one exceeding 
that of the Federal Reserve Bank. Other cities within the district 
of importance in banking capacity are Little Rock, Memphis and 
Louisville, of which the last-named is a national bank reserve city. 
Taking the district as a whole it is estimated to have nearly 2500 
banks of all kinds reporting to the Comptroller of the Currency. 



NINTH DISTRICT— MINNEAPOLIS. 



Regional Area Of 438,000 Square Miles Embraces Five States 
With 3901 Banks Between Lakes And Mountains. 



Crop Season Among the Shortest Intensifies the Activities in Han- 
dling Season' s Products from Agriculture, Dairying and Graz- 
ing, Lumbering and Mining Mark Districts — Spring Wheat 
and Flour. 



From East to West the Minneapolis district stretches three- 
fourths of the way across the continent between the upper lakes and 
the Pacific. Between Sault Ste. Marie and the mountains in Mon- 
tana, which form the western border of this region, is a distance of 
1500 miles, greater than that from New York to Omaha. From 
North to South the Minneapolis district is approximately 225 miles, 
comprising in these five states an area of 438,000 square miles, or 
23,000 miles more than the combined area of France and the German 
Empire in Europe. 

These striking features belong to a district within which lies 
the world's chief center of wheat-flour production, three of the most 
important spring wheat states, one of the largest livestock and wool- 
producing areas on the continent, the second largest copper produc- 
ing state, and the chief distributive gateway to and from the North- 
west. 

In the Minneapolis district large area is conjoined with the 
smallest population of any of the twelve reserve areas. Its 687 banks 
serve 5,725,000 people, contributing to the Federal Reserve Bank a 
subscription of $4,702,865. These figures are, of course, not a com- 
plete index of this district's banking resources. The five states have 
3901 banks, of which 3214 are non-members of the reserve banking 
group. 

The bank clearings of Minneapolis in 1913 were $1,312,000,000. 
Those of St. Paul, its twin neighbor, were $530,000,000, making 
$1,842,000,000 of clearings in both cities. This compares with such 
other clearing centers as Baltimore, Cincinnati, Cleveland and Los 
Angeles, among clearing points which have over $1,000,000,000 a 
year to handle and of which there are only fifteen in the country. 

A feature of this district's banking is the small number of re- 



128 THE FEDERAL RESERVE ACT. 

serve cities under the national hanking arrangement. West of 
Minneapolis anil St. Paul, the only two reserve cities in the district, 
there is no other this side of Spokane, which is 2500 miles distant in 
the Pacific coast district. Out of 363 hanks in the reserve cities' 
list there are eleven in these two reserve centers. Holdings of specie 
in Minneapolis banks were $5,529,585 on January 13. The only 
reserve centers where larger holdings were found west of the Mis- 
sissippi were San Francisco, Los Angeles, Denver and Kansas City. 

Banking service throughout this territory has to deal mainly 
with six leading branches of industry. These include agriculture, 
dairying and grazing; flour manufacture, lumbering, the oil-seed 
industry, and copper and iron ore mining. As a source of wealth the 
annual increment from the four states outside of Wisconsin from 
the hay and grain industry has a value of $450,000,000. 

Climatic conditions have a controlling share in the relations of 
banking to the industries of this northern latitude. The killing frost 
limits throughout these states lie within the narrow period of four 
months, from May 20 to September 20, as a rule. On this account 
banks are required to subordinate everything else to the exigencies 
of the short season to an extent that is not known farther South. 

The intensity of the productive period is thus greatly enhanced 
and the demand for credit and cash are concentrated accordingly, 
in both making and marketing products. This applies to the crops 
rather than to livestock. But in the marketing of both of these com- 
modities the rush of traffic between the areas of production and the 
points of concentration is greatly intensified by the effort to move 
the season's crops as largely as possible before the severe winter 
weather sets in. 

The three western states in this district are not largely supplied 
with banks and there are few large institutions. Montana, North 
Dakota and South Dakota together have only thirteen national 
banks whose loans and discounts exceed $1,000,000 each. The larg- 
est of these at Butte, Mont., had assets of this class amounting to 
$2,842,830 on August 9, 1913, and individual deposits of $4,650,693. 
Fargo in North Dakota leads with loans and discounts of $2,477,695. 
Other prominent points through which some characteristic product 
of the district is prominent in trade and banking are Billings and 
Great Falls in the Montana wool trade and in smelting operations, 
along with Helena, Miles City and Lewiston as general business 
centers. In North Dakota, Fargo and Grand Forks rank in this 
class of banks, and Lead in South Dakota. Pierre and Bismarck 
in the Dakotas are both prominent grain centers in the spring wheat 
territory. As a wool producer Montana has the largest number of 



THE FEDERAL RESERVE ACT. 129 

sheep of shearing age and its flocks totaling 4,300,000 head yield over 
31,000,000 pounds of wool at a value little less than $12,000,000. 
On the average this state produced nearly 27% of the country's 
copper yield in the five years of 1908-12. The Dakotas produce 
wool totaling 5,000,000 pounds a year at a value of $2,000,000, but 
their eminence lies in grain and cattle. 

Within the three states of Minnesota and the two Dakotas 
80% °f this country's spring wheat is grown. North Dakota is the 
largest single wheat producing state on the continent. Its yield in 
1912 of 143,820,000 bushels combined with 52,185,000 in South 
Dakota, and 67,038,000 from Minnesota, made a grand total of 263,- 
043,000 bushels. This is an indication of the volume of traffic which 
railroads have to handle and the banks finance at as early a period as 
practicable after August harvesting and before winter interferes 
with the freedom of traffic. 

The movement of produce is generally eastward to the great 
milling or meat-packing centers and to the ports of the lakes. The 
four northwestern states in 1913 produced grain and potatoes, 
amounting to 759,000,000 bushels of an estimated worth of $407,- 
413,000. Growth in the volume of business may be taken as a gauge 
of the necessity for banking expansion. In 1900 Minneapolis and 
Duluth received slightly more than 150,000,000 bushels of grain, 
compared with 337,000,000 bushels in 1912. Receipts at Min- 
neapolis alone that year were worth $193,000,000 and the combined 
value of grain and flaxseed at Duluth and Minneapolis was $328,- 
783,000. 

Fifty-one flour mills outside of Minneapolis, known as country 
mills, absorb enough wheat to produce 25,000 barrels of flour a 
day, running at 62% of capacity, resulting in a yearly output of 
7,500,000 barrels. Minneapolis mills together with these fifty-one 
country mills in 1913 manufactured 25,173,725 barrels of flour with 
a total value of $96,918,841. Besides this the linseed oil industry 
represents a production value of $21,000,000. And the feedstuffs 
output is a factor in the district's dairying and livestock produc- 
tion, both of which are vitally identified with the banking facilities 
of these states. 

Terminal facilities at the eastern end of this territory include 
fifty elevators at Minneapolis with a capacity of 38,550,000 bushels 
of grain. Duluth-Superior, the main receiving points at the upper 
lakes, have twenty-four elevators providing for 32,270,000 bushels. 
Together these two points can store 70,825,000 bushels of grain. 

The purchasing power of these streams of crops and cattle and 
wool and mineral products makes the annual distribution of mer- 



130 THE FEDERAL RESERVE ACT. 

chandise one of the phenomenal phases of northwestern business. 
As the staples enter into the channels of commerce they create the 
return currents of banking credits and of manufactured commodities. 
It is this that gives to the Minneapolis-St. Paul gateway its prime 
importance in mercantile distribution. Minneapolis alone as a 
jobbing center during 1913 forwarded 160,000 cars of merchandise 
and St. Paul 85,000. Including agricultural implements and lum- 
ber and lumber products, the total number of forwardings and re- 
ceipts for Minneapolis alone were 225,000 cars and 156,000 cars for 
St. Paul. The implement trade of Minneapolis is placed at $40,000,- 
000 a year, and the annual shipments of the products of this industry 
alone comprise 25,000 carloads. 

Financing the northwestern crops, its livestock production, its 
lumber industries and its milling operations constitutes the largest 
work of the banks in this district. As an indication of the size of this 
business Minneapolis banks last year paid grain drafts aggregating 
$217,909,000 and shipped $34,358,000 of currency. At the beginning 
of the crop movement the weekly clearings were $17,776,000 in 
August, 1913, and they rose to $37,616,000 in October. 

Out of town checks handled by the banks of Minneapolis in 1913 
aggregated $1,328,274,000. As a Federal reserve center the lines 
of business activity, especially in Minnesota and Wisconsin, radiate 
in all directions. For the Dakotas and Montana the transconti- 
nental railway lines connect these states closely with their reserve 
center of commerce and credit resources. None of the regional 
centers is more intimately linked with its field than is Minneapolis, 
at which point 3329 northwestern banks carry reserve and exchange 
accounts. 



TENTH DISTRICT— KANSAS CITY. 



Beef Cattle Industry Of Southwest Source Of Immense 
Flotations Of Cattle Paper Through This Market. 



Small National Banks and Numerous Reserve Cities Features of 
Banking Organization Under the National System — Industries 
and Trade in Which Kansas City Enjoys Primacy— Other 
Leading Financial Centers. 



Four complete states and minor portions of three adjacent states 
are included in Federal Reserve District No. 10. Kansas and 
Nebraska are two of the most wonderful grain producers on the 
western continent. Two other states of Colorado and Wyoming are 
famous for their mineral and grazing wealth. This combination of 
agricultural, pastoral and mineral demands for the employment 
of capital and labor give to the states forming this group a comple- 
mental character as banking communities, each of which is at some 
stage of the year of special service to the others. Besides these four 
states, the western quarter of Missouri, including the Joplin zinc and 
lead districts and the St. Joseph packing center, the northern half of 
Oklahoma and the upper third of New Mexico belong to the reserve 
district of which Kansas City is the center. 

Kansas City, the home of the reserve bank for a territory whose 
area is 509,649 square miles, stands within about 25 miles of the 
eastern limit of the district. Its selection was made on commercial 
and financial rather than on geographical grounds. Within the first 
few hundred miles of this center an elaborate network of trans- 
portation lines radiates. Beyond that the western border of Colo- 
rado is 770 miles from Kansas City, and from the center to the 
Yellowstone Park district in the northwestern corner of Wyoming is a 
distance of 850 miles in a straight line. This area is larger than the 
areas of the New York, the Philadelphia, the Richmond and the 
Atlanta districts combined. 

In point of commercial equipment Kansas City has sixteen trunk 
line railroads and thirty-two subsidiaries. Both together contribute 
and take out on the average 260 passenger cars and 2000 cars of 
freight every twenty-four hours. The mail service of the most dis- 



132 THE FEDERAL RESERVE ACT. 

tant points slightly exceeds 1000 miles in length of run and thirty-six 
hours' time. But the great majority of places in its banking area 
lie within a radius of 400 miles. There are approximately 3000 
banking towns in the district and the number of outside accounts 
carried approximates 5000 with Kansas City banks. 

The Kansas City Clearing House, according to statements made 
before the Reserve Bank Organization Committee by the associated 
banks and trust companies, handles an average of 265,500 items daily. 
The banks of this market in their country collections deal directly 
with 3300 country banks within a radius of 120 miles, or a five hours' 
ride. 

An index to the growth in banking operations of this territory 
may be found in the increase in the volume of bank clearings. In 
1900 they were $775,265,000 and in 1913 they had grown to $2,850,- 
363,000, or more than trebling and not far from quadrupling in thir- 
teen years. Since 1906 Kansas City increased its clearing 113% and 
from 1903 to 1913 as much as 165%. 

Banking in this district deals primarily with the extractive in- 
dustries, many of whose products are marketed seasonally. At 
this center thousands of farms and ranges, in the wide territory be- 
tween the Missouri and the Rocky Mountains, empty their staples 
as into a funnel, mainly in a west to east movement. It is this that 
gives Kansas City a primacy of its own as a distributing point in the 
hay trade, in the corn and winter wheat market, in yellow pine 
lumber, in the livestock movements and in the shipping of agricultural 
implements as well as supplies of merchandise for farm, ranch and 
lumber and mining camps. 

As a clearing point for stockers and feeders no other place equals 
the service of the Kansas City stockyards. In 1913 livestock from 
twenty-nine different states and from Mexico was marketed here to 
the value of $224,000,000, including approximately 7,500,000 head. 
Nearly 1,000,000 of cattle were shipped out for further feeding last 
year at a value of $50,000,000. 

No other part of the world has shared so largely as this market 
and district in financing the species of commercial bills known through- 
out the stock-raising West as cattle paper. Within this market's 
tributary territory there are 11,000,000 head of beef cattle, or about 
30% of the total in the United States. Out of 2,319,000 head of 
cattle received last year, 914,000 were shipped out to local and dis- 
tant points. Besides these over 5,000,000 head of hogs and sheep 
were received in 1913. 

The larger portion of all livestock receipts is absorbed in the 
vast packing-Kouse industries. The meat packing industry here 



THE FEDERAL RESERVE ACT. 133 

ranks next to that of Chicago. The sale of products in 1913 amounted 
to $178,000,000 calling for 5,636,000 head of cattle, hogs and sheep. 
This still leaves within the Kansas City banking district a total 
number of cattle larger than the whole of Canada and as many as 
are found in England, Wales and Scotland combined. 

As the leading winter wheat market in this country and the 
foremost exporting point, this regional center handles more than 80% 
of the grain to other countries by way of the gulf ports. Local 
elevators provide for 14,000,000 bushels, in the carrying of which 
the local bankers render a continuous service by means of advances 
on warehouse grain certificates. The movement of grain through this 
market ranges from about 50,000,000 to 75,000,000 bushels a year, 
not including the distribution of from 30,000,000 to 35,000,000 
bushels financed through Kansas City but not shipped through that 
market. Quoting a trade estimate, "fully 100,000,000 bushels 
of grain paid for by Kansas City merchants is fully financed by Kan- 
sas City banks." 

This banking territory, two thirds the size of Mexico, in the 
heart of the country, embraces some of the richest alluvial plains of 
the continent. It has 29,000 miles of railways, 935 assenting banks 
and a population of 6,307,000 inhabitants. The territory abounds 
in natural resources for the application of human labor and banking 
power. On the west lie the wool-producing territories with the 
choicest grazing in the long mountain valleys in the rearing and mar- 
keting of whose flocks the banks of this district render a constant 
service. 

District Xo. 10 has twelve reserve cities with 58 national banks. 
Two of these have an outstanding circulation of S3, 419, 000 and $4,- 
747,000 respectively with a third of $2,612,000. The two states of 
Colorado and New Mexico have together over $75,000,000 invested 
in the value of cattle and sheep, many of which are from 700 to 900 
miles away from their main market. 

Denver, the financial center of the Colorado- Wyoming end of 
tin* district, plays a prominent part in the development of the moun- 
tain states industries. Six of its national banks report loans and 
discounts amounting to $29,212,000 and individual deposits of $35,- 
587,000. Omaha in the northeastern end utilizes even larger bank- 
ing resources as measured by institutions and loans and discounts. 
Besides these Lincoln, South Omaha, Topeka, St. Joseph and Okla- 
homa City occupy the rank, as banking centers, of reserve cities in 
the national banking organization. 

No estimates of the natural or institutional resources of this 
district would be complete without mention of the mineral oil and the 



134 THF, FKDKRAL KKSKKYK ACT. 

natural gas supplies which within recent years have brought immense 
Wealth to their developers. In addition to these the zinc and had 
smelting industry of western Missouri and eastern Kansas contrib- 
utes more than half of the zinc production in the United States. 
The pipe line companies bring supplies of oil as far as 258 miles to 
Kansas City. The flour manufacturing industry of the territory has 
an annual output of 13,000,000 barrels valued at $58,000,000. The 
small flour mill, the small country town and the small national bank 
are features of this portion of the West. Next to Chicago this 
regional area has the largest number of assenting national banks in 
the country. Out of 423 national banks organized in these four 
states between March 14, 1900, and October 31, 1913, a total of 262, 
or 62% > belonged to the class with capital of $25,000 each. 

Seasonal rotation in the employment of banking resources is 
probably as well realized in this district as in any other on account of 
the variety of its enterprises. "In the spring," according to the 
statement made at the hearings of the Organization Committee, 
"the livestock interests are using liberal sums in moving the cattle 
from the ranges into the fattening fields and pastures. In the early 
summer the wheat crop is moving, and in the latter summer and early 
fall the cotton from our southern territory. In the late fall and early 
winter there is a movement of cattle into feed lots, and throughout the 
winter until spring the corn and full fed livestock are coming to 
market. Through the entire year the coal, lead and zinc mines, and 
the almost unlimited oil production is constantly moving. By this 
rotation of business, while one section of the country is marketing its 
products freely, another section will be calling for funds." 



ELEVENTH DISTRICT— DALLAS. 



Regional Center With All-Year Round Cotton Banking, 
Trucking, Cattle And Merchandising. 



Cation Oil Mills and Lumber Production Have Received Large De- 
velopments in This Territory — Mines of New Mexico Figure 
in Xatural Resources — Dallas Main Southwest Center of 
Interurban Railuay Lines. 



The Dallas Federal reserve district belongs to a group of four 
which, together, cover somewhat more than the western half of the 
United States. In area and in population the districts served 
through Dallas, Kansas City, Minneapolis and San Francisco fall 
into the same general class. There is no attempt at selection of 
reserve point with regard to territorial centrality. All of these 
reserve cities are located in that portion of the district which is 
economically most highly developed. Extent of service rather than 
equalizing of distances is the rule of arrangement. 

The area of the Dallas district, embracing 404,826 square miles, 
is almost equal to that of the Richmond and Atlanta districts com- 
bined. But its population of 5,310,000 is barely one-third as large. 
It has 726 banks compared with 842 for the two districts mentioned. 
Excepting Kansas City district, the Dallas region has the largest 
number of assenting banks of the western group. It ranks ninth 
in capital as in population. 

The subscription to the new bank of $5,520,000, makes it one 
of the smallest for a territory which includes all of Texas, the portion 
of Louisiana west of the Mississippi, five-sixths of New Mexico, the 
lower portion of Oklahoma and southeastern Arizona. Its princi- 
pal cities are Galveston, Houston, Waco, Fort Worth, San Antonio, 
Austin and Shreveport, all leading cotton markets. McAlister, 
Okla.; Albuquerque, N. M., and Tucson, Ariz., are all representa- 
tive of their states. 

Banking facilities in the Dallas district are estimated to include 
780 banks of all kinds, of which 726 are in the Federal reserve or- 
ganization as national banks. Dallas itself has only five national 
banks, having gained but one during the past ten years, but its capi- 
tal and surplus combined of $5,900,000 on August 9, 1913, increased 



1903 


1913 


Inc. 


Inc. % 


.$2,168,000 


$5,900,000 


$3,732,000 


172 


. 6,388,000 


19,816,000 


13,428,000 


210 


. 5,915,000 


18,918,000 


13,003,000 


220 


. 2,350,000 


7,050,000 


4,700,000 


200 


. 6,923,000 


25,612,000 


18,689,000 


270 


. 6,794,000 


22,597,000 


15,803,000 


233 


. 1,865,000 


4,950,000 


3,085,000 


165 


. 4,803,000 


15,507,000 


10,704,000 


223 


. 3,934,000 


11,707,000 


7,773,000 


199 



136 THE FEDERAL RESERVE ACT. 

from $2,168,000 ten years before, or at the rate of 172%. Loans 
and discounts in the same decade rose 210% and individual deposits 
220%. The three leading cities of Texas show growth of banking 
resources as follows in the same decade: 

Dallas: 
Capital and surplus 
Loans and discounts 
Individual deposits . 

Houston: 
Capital and surplus 
Loans and discounts 
Individual deposits '. 

Fort Worth: 
Capital and surplus 
Loans and discounts 
Individual deposits . 

Agriculture, grazing, fruit and vegetable growing, cane sugar 
production, oil production and mining — these are the several leading 
sources of wealth in the annual production of district No. 11. Prac- 
tically one-third of the cotton crop is produced within this area. 
Taking cotton and cotton-seed together the estimated income from 
this single source ranges according to prices and seasons from $250,- 
000,000 to $350,000,000 a year. Banking operations in the staple 
ordinarily begin early in the calendar year and extend to the holidays 
at the close. The district is never so well supplied with funds of its 
own during much of the cotton producing season as to be independent 
of borrowing from the outside. 

On the other hand, after sales of cotton have cleared the ac- 
counts of growers with merchants and banks, the accumulations 
have from three to six months of more or less inactivity. These idle 
deposits may seek investment in short-term paper, may drift to re- 
serve centers as balances in correspondent banks to earn from two 
to three per cent., or the banks themselves may seek out other 
forms of loans in the grazing or in the lumbering industry, in both 
of which this district is a large and extensive producer. 

Texas is the wintering ground for millions of livestock, including 
cattle and sheep, but especially cattle. These begin to move north- 
ward as soon as Kansas and Nebraska pastures are ready in the 
spring. The mountain states also draw heavily on Texas cattle. 
This breeding and feeding industry gives rise to much cattle paper 
which seeks wider markets in many cases through the banks of 
Dallas, Kansas City and St. Louis. Cattle financing is complemen- 



THE FEDERAL RESERVE ACT. 137 

tal in its relation to cotton growing in that the main demand in each 
case is not overlapping, but successive in their order. 

Between the time of heavy demands for cotton production in the 
summer, and following the cattle movement northward, the early 
vegetable shipments occur, contributing the first main income in the 
calendar year's products. Lumbering, which is quite general through- 
out the south and east of the state, is more generally an autumn 
and winter campaign. Texas contains one of the finest areas of 
pine timber in the country. 

The panhandle district of the northwest, long famous for graz- 
ing, is rapidly yielding to the inroads of settlers, where the produc- 
tion of grains and grasses are steadily enriching the productivity 
of the district. 

All of these states are of note as sources of mineral supplies. 
New Mexico reports a production in 1912 of the precious and semi- 
precious metals valued at 88,528,000. In 1904 this total was less 
than $2,000,000. The state's coal production yielded 3,536,000 
tons in 1912. Copper contributed over 34,000,000 pounds. A 
phenomenal increase is shown from barely 4,000,000 pounds in 1911, 
principally due to the output of the Chino Copper Co. 

Oil and gas wells of Texas add $9,000,000 to the state's wealth 
a year. The petroleum area of 400 square miles produces 31,000 
barrels daily, has 1800 miles of pipe line, and the state contains eight 
oil refineries. Exports, through Port Arthur and Galveston mainly, 
exceeded 136,000,000 gallons valued at $6,500,000. 

The natural gas resources of Oklahoma are of enormous worth as 
a fuel in the production of light and power. The development of 
manufacturing industries, of municipal utilities and of interurban 
electrical lines is to a large extent the outcome of the presence of an 
economical fuel supply. 

Dallas, the regional reserve city, is the most conspicuous focus 
in the evolution of this species of public utility of which there are 
some thirty lines in operation throughout the state with a track 
mileage of 650 miles or more, a capital invested of $33,000,000 and 
with more than 1000 cars in service. 

These facilities together with the railway equipment to the dis- 
trict afford to the leading cities in all of these states main lines of 
travel and traffic. 

Manufacturing industries based on the wealth of raw materials 
at hand afford numerous lines in which investment and working capi- 
tal are in all year round demand. There are approximately 6200 
cotton gins which operate for about three months during the pick- 
ing season. Cotton-seed oil mills in the three cotton-growing states 



L38 THE FEDERAL RESERVE ACT. 

in this district have 260 establishments consuming about 2,000,000 
tons of cotton-seed. The period of operation is much longer in this 
case. Lumber mills at their best year of record in 1907 in Texas 
alone turned out 2,230,000,000 feet. The mills comprising more than 
800 have an investment of $45,000,000. The state has fifteen 
mills with a capital of $2,229,000. The state of Texas consumes 
200,000,000 bushels of corn a year and produces an average of about 
140,000,000 bushels. It is dependent upon the outside states to 
supply its deficit; and Louisiana, within this banking district, has 
become a source of surplus corn for the feeding requirements of 
Texas livestock which consumes feedstuffs valued at $50,000,000 a 
vear. 



TWELFTH DISTRICT— SAN FRANCISCO. 



Far Western Region Of 694,000 Square Miles Area Exactly 
The Size Of Turkish Empire In Asia. 



Seven States Comprising This Banking Unit Include Country's 

Main Precious Metal Resources — Output of Five Metals in 

IQ12 Was $iq'j, 135,000 in Value — Enormous Forestal 

Areas in California, Oregon, Washington. 



Federal reserve districts cover larger areas as they extend West. 
Those along the Atlantic seaboard and in the north central states are 
small compared with the four westerly regions centering in Min- 
neapolis, Kansas City, Dallas and San Francisco. The last-named of 
these has 694,000 square miles of territory. This is 50,000 square 
miles larger than the combined area of the first six districts beginning 
with Boston and ending with Atlanta. The San Francisco business 
area is exactly as large as that of the Turkish Empire in Asia. And 
its geographical position, topography, variety of climate and natural 
resources give it a truly imperial character as a field for banking ser- 
vice in the work of economic development. 

National institutions assenting in the district up to March 4 
were 514. There are six other districts which include a larger num- 
ber of banks. In population it is among the smallest, the total being 
5,389,000. But it ranks high in banking resources. The capital 
and surplus, on the basis of which the regional reserve bank is built, 
was $130,423,000 on the above date. It, therefore, ranks above 
any other district located west of the Mississippi. Its central bank 
is entitled to a capital of $7,825,000, making it sixth among the 
twelve regional banks in the capital subscribed. 

These seven states of California, Oregon, Washington, Idaho, 
Nevada, Utah and Arizona comprise a banking unit different from 
any other into which the country is divided . In its history and evolu- 
tion it has had a larger degree of isolation than any other. Chiefly 
on that account, it has worked out its financial agencies and methods 
on rather unique lines. Gold as a currency has for over 60 years 
played a much larger part throughout this territory than elsewhere 
in the United States. 

This fact is evident from a comparison of the gold coin holdings 
of the fifty reserve cities. The nine San Francisco banks held on 
January 13, 1914, as much as 20% of the gold in coin form in 363 



140 THE FEDERAL RESERVE ACT. 

reserve city banks. How the regional center on the Pacific seaboard 
compares with other Federal reserve points in coin and specie hold- 
ings is shown below, excepting for Richmond and Atlanta: 

Gold Coin Total Specie 

Boston $7(54,657 $28,037,482 

New York 4,834,326 254,099,235 

Philadelphia 2.329,499 39,203,151 

Cleveland 1 ,993,662 7,805,166 

Chicago 5,461,862 61,559,491 

St. Louis 1,430,920 18,291,214 

Minneapolis 2,346,699 5,529,585 

Kansas City 1,384,042 7,229,391 

Dallas 256,392 1,891,927 

San Francisco 14,066,675 18,600,962 

The development of the west coast began with gold as the 
primary object of mining enterprise, and that continues to be one 
main source of wealth. California now yields gold to the value of 
about $20,000,000 a year. Other mineral industries have their 
sources throughout the mountain states, including 20 copper smelting 
plants, producing nearly half of the country's output. But the most 
recent increase is in the oil-bearing properties of California. This 
has now become one of the world's main sources of supply. The 
state's production of 1910 was 77,697,000 barrels out of a total for 
the United States of 204,000,000 barrels. That of 1913 is estimated 
at 98,000,000 barrels for that state alone. 

Between the Rocky Mountains and the Pacific seaboard, within 
which bounds these states lie, the precious metal and associated 
metals are most widely found. The gold and silver, according to the 
Geological Survey, produced in 1912 in this territory was valued at 
$69,129,000, of which $44,525,000 was the value of gold and $24,- 
604,000 that of silver. California and Nevada lead all others in 
gold production, together contributing three-fourths of the yield 
of the district, while Nevada and Utah supply three-quarters of 
the silver output. 

Taking the seven states together the output of the five metals 
including gold, silver, copper, lead and zinc shows a value for 1912 of 
$197,135,000 derived from 25,493,000 tons of ore mined from 2761 
properties. Arizona alone, a state of which probably less is known 
than any in the Union, produces mineral wealth of these classes 
somewhat in excess of $67,000,000. 

The district's wealth in forest ranks first in the United States. 
The wooded area of California is estimated at 28,000,000 acres, of 
which 24,000,000 are in national forest reserves, or nearly 80%. 



THE FEDERAL RESERVE ACT. 141 

The famous redwood timbers on the northern coast of California 
comprise more than 1,000,000 acres from which about 400,000,000 
feet are cut annually. Oregon's supply of standing timber is esti- 
mated at from 500 to 545 billion feet — about one-fifth of the nation's 
entire supply. Fifty billion to one hundred billion feet more are 
found in the southern part of Washington. Lumbering is the greatest 
of Oregon's industries and brings to the state an annual income of 
$30,000,000. 

In the production of lumber, which is the Pacific coast's most 
widely distributed natural asset, the state of Washington stands first 
as a producer. This business turns out a product worth 842,000,000 
on cars at the mills. The amount of standing timber in Washing- 
ton, Oregon and Idaho is estimated at 1,068,000,000,000 feet. 

The orcharding of this district ranges from the citrus fruits in 
the tropical climate of southern California to the apple orchards of 
the Hood River valley within sight of the perpetual snows of Mount 
Hood. The barley yields of Washington and Oregon have become 
well established in the yearly demands of European brewers. Last 
year three upper Pacific markets received 42,000 cars of wheat. The 
Orient depends more or less regularly on the wheat and flour of the 
west coast. The salmon pack of this district, embracing the Pacific 
Northwest, has been as high as $25,000,000 in value a season and 
finds a world-wide market. A single Portland financing company 
has $10,000,000 employed in loans in the cattle and sheep industries. 

Throughout this territory, in practically every state, the irriga- 
tion of arid lands has reached its highest and most extensive develop- 
ment. Much of the United States Government's reclamation work, 
covering over 3,000,000 acres, lies in this regional area. California 
has 335 valley units in which 3,192,000 acres are irrigated and 9,699,- 
000 acres are ultimately available for irrigation, including the Im- 
perial valley with its incredible productiveness under an adequate 
water supply. 

In the extent of its coast line the Pacific district stands quite 
unrivalled. Between San Diego and Seattle there is a length of 
ocean littoral of 1200 miles, reaching from the 33d to near the 49th 
degree of latitude. These shores are indented with such famous 
commercial roadsteads as the bays of San Diego, of San Francisco 
and Eureka in California; and Portland, Seattle, Tacoma and 
Olympia in Oregon and Washington. Back from the coast this bank- 
ing district reaches from 400 to 800 miles, embracing vast intermoun- 
tain plateaus in which such cities as Spokane, Boise City, Carson, Salt 
Lake and Phoenix are financial capitals of their respective business 
empires. 



142 



THE FEDERAL RESERVE ACT. 




BOUNDARIES OF 
THE FEDERAL RESERVE DISTRICTS. 



As Established By The Organization Committee. 



DISTRICT NO. 1. 

The New England States: Maine, New Hampshire, Vermont, 
Massachusetts, Rhode Island, and Connecticut, with the city of 
Boston as the location of the Federal Reserve bank. 

district no. 2. 

The State of New York, with New York City as the location 
of the Federal Reserve bank. 

district no. 3. 

The States of New Jersey and Delaware and all that part of 
Pennsylvania located east of the western boundary of the following 
counties: McKean, Elk, Clearfield, Cambria, and Bedford* with the 
Federal Reserve bank in the city of Philadelphia. 

district no. 4. 

The State of Ohio; all that part of Pennsylvania lying west of 
district No. 3; the counties of Marshall, Ohio, Brooke, and Hancock, 
in the State of West Virginia; and all that part of the State of Ken- 
tucky located east of the western boundary of the following coun- 
ties: Boone, Grant, Scott, Woodford, Jessamine, Garrard, Lin- 
coln, Pulaski, and McCreary; with the city of Cleveland, Ohio, 
as the location of the Federal Reserve bank. 

district no. 5. 

The District of Columbia, and the States of Maryland, Vir- 
ginia, North Carolina, South Carolina, and all of West Virginia 
except the counties of Marshall, Ohio, Brooke, and Hancock, with 
the Federal Reserve bank located in the citv of Richmond, Va. 



144 THE FEDERAL RESERVE ACT. 

DISTRICT NO. 6. 

The States of Alabama, Georgia, and Florida; all that part of 
Tennessee located east of the western boundary of the following 
counties: Stewart, Houston, Wayne, Humphreys, and Perry; all 
that part of Mississippi located south of the northern boundary of 
the following counties: Issaquena, Sharkey, Yazoo, Kemper, Madi- 
son, Leake, and Neshoba; and all of the southeastern part of Louisi- 
ana located east of the western boundary of the following parishes: 
Pointe Coupee, Iberville, Assumption, and Terrebonne, with the 

city of Atlanta, Ga., as the location Of the Federal Reserve bank. 

% 

DISTRICT NO. 7. 

The State of Iowa, all that part of Wisconsin located south of 
the northern boundary of the following counties: Vernon, Sauk, 
Columbia, Dodge, Washington, and Ozaukee; all of the southern 
peninsula of Michigan, viz., that part east of Lake Michigan; all 
that part of Illinois located north of a line forming the southern 
boundary of the following counties: Hancock, Schuyler, Cass, 
Sangamon, Christian, Shelby, Cumberland, and Clark; and all that 
part of Indiana north of a line forming the southern boundary of the 
following counties: Vigo, Clay, Owen, Monroe, Brown, Bartholo- 
mew, Jennings, Ripley, and Ohio, with the Federal Reserve bank 
located in the city of Chicago, 111. 

district no. 8. 

The State of Arkansas, all that part of Missouri located east of 
the western boundary of the following counties; Harrison, Daveiss, 
Caldwell, Ray, Lafayette, Johnson, Henry, St. Clair, Cedar, Dade, 
Lawrence, and Barry; all that part of Illinois not included in dis- 
trict No. 7; all that part of Indiana not included in district No. 7; 
all that part of Kentucky not included in district No. 4; all that part 
of Tennessee not included in district No. 6; and all that part of 
Mississippi not included in district No. 6, with the city of St. Louis, 
Mo., as the location of the Federal Reserve bank. 

district no. 9. 

The States of Montana, North Dakota, South Dakota, Min- 
nesota, all that part of Wisconsin not included in district No. 7, 
and all that part of Michigan not included in district No. 7, with the 
city of Minneapolis, Minn., as the location of the Federal Reserve 
bank. 



THE FEDERAL RESERVE ACT. 145 

DISTRICT NO. 10. 

The States of Kansas, Nebraska, Colorado, and Wyoming, all 
that part of Missouri not included in district No. 8, all that part of 
Oklahoma north of a line forming the southern boundary of the 
following counties: Ellis, Dewey, Blaine, Canadian, Cleveland, 
Pottawatomie, Seminole, Okfuskee, Mcintosh, Muskogee, and Se- 
quoyah; and all that part of New Mexico north of a line forming the 
southern boundary of the following counties: McKinley, Sandoval, 
Santa Fe, San Miguel, and Union, with the city of Kansas City, 
Mo., as the location of the Federal Reserve bank. 

district no. 11. 

The State of Texas, all that part of New Mexico not included in 
district No. 10; all that part of Oklahoma not included in district 
Xo. 10; all that part of Louisiana not included in district No. 6; 
and the following counties in the State of Arizona: Pima, Graham, 
Greenlee, Cochise, and Santa Cruz, with the city of Dallas, Tex., 
as the location of the Federal Reserve bank. 

district no. 12. 

The States of California, Washington, Oregon, Idaho, Nevada, 
and Utah, and all that part of Arizona not included in district No. 
11, with the city of San Francisco, Cal., as the location of the 
Federal Reserve bank. 



146 THE FEDERAL RESERVE ACT. 



TABLE. 

Showing subscription to stock of Federal reserve banks by national 
banks with area and population of each district. 

Districts National Banks, March 4, 1914 



Dis- 
trict Fed. Res. 
No. cities 


Land area 
in sq. 
miles. 


Popula- 
tion 


Num- 
ber of 
banks 


Capital and 
surplus 


6 per cent, 
subscription 


1 Boston. . . 


. 61,976 


6,552,681 


446 


$165,529,010 


$9,931,740 


2 N.Y.r. . 


47,654 


9,113,614 


478 


v343,693,437 


20,621,606 


3 Phila, . 


40,527 


7,932,065 


800 


.216,340,213 


12,980,412 


4 Cleveland 


. 72,615 


8,326,668 


724 


-192,147,258 


11,528,835 


5 Richm'd . . 


152,931 


8,519,310 


475 


105,064,483 


6,303,869 


6 Atlanta. . . 


232,349 


8,660,575 


372 


77,356,913 


4,641,416 


7 Chicago . . 


160,192 


12,355,923 


984 


£11,068,338 


12,664,100 


8 St. Louis. . 


194,947 


8,740,582 


434 


80,717,981 


4,843,079 


9 Minn 


444,226 


5,188,730 


687 


78,381,081 


4,702,865 


10 Kan. City 


444,444 


5,638,895 


835 


93,065,912 


5,583,956 


11 Dallas.... 


438,177 


5,853,919 


726 


92,003,123 


5,520,187 


12 San Fran . 


683,852 


5,089,304 


514 


^130,423,422 


7,825,405 



Total .2,973,890 91,972,266 7,475 1,785,791,171 107,147,470 



THE PERSONNEL. 



FEDERAL RESERVE BOARD AND FEDERAL RESERVE 

BANKS. 

FEDERAL RESERVE BOARD. 

ex-officio members: 

William G. McAdoo, Secretary of the Treasury, chairman. 
John Skelton Williams, Comptroller of the Currency. 

Charles S. Hamlin, Boston, Mass., governor, two years. 
Frederic A. Delano, Chicago, 111., vice-governor, six years. 
Paul M. Warburg, New York, N. Y., four years. 
W. P. G. Harding, Birmingham, Ala., eight years. 
Adolph C. Miller, San Francisco, Cal., ten years. 

H. Parker Willis, Secretary. 



FEDERAL RESERVE BANKS. 

BOSTON DISTRICT NO. 1. 

Class "C" — Frederic H. Curtiss, Boston, Federal Reserve 
Agent and Chairman of Board of Directors. Walter S. Hackney, 
Providence, R. I., Deputy Federal Reserve Agent and Vice-Chair- 
man of Board of Directors. Allen Hollis, Concord, N. H-., Director. 

Class "A" — Thomas P. Beal, Boston, Mass., Group No. 1. 
C. G. Sanford, Bridgeport, Ct., Group No. 2. A. M. Heard, Man- 
chester, N. H., Group No. 3. 

Class "B" — Charles A. Morss, Boston, Mass., Group No. 1. 
E. R. Morse, Proctor, Vt., Group No. 2. Charles G. Washburn, 
Worcester, Mass., Group No. 3. 

Governor, Alfred L. Aiken. 

NEW YORK DISTRICT NO. 2. 

Class "C" — Pierre Jay, New York City, Federal Reserve 
Agent and Chairman of Board of Directors. Charles Starek, New 
York City, Deputy Federal Reserve Agent and Vice-Chairman of 
Board of Directors. George F. Peabody, Lake George, N. Y., 
Director. 

Class "A"— William Woodward, New York, N. Y., Group No. 
1. Robert H. Treman, Ithaca, N. Y., Group No. 2. Franklin D. 
Locke, Buffalo, N. Y., Group No. 3. 

Class "B"— H. R. Towne, New York, N. Y., Group No. 1. 
William B. Thompson, Yonkers, N. Y., Group No. 2. Leslie R. 
Palmer, Croton-on-Hudson, N. Y., Group No. 3. 
Governor, Benjamin Strong Jr. 



1 is THE FEDERAL RESERVE ACT. 

PHILADELPHIA — DISTRICT NO. 3. 

Class "C" — Richard L. Austin, Philadelphia, Federal Reserve 
Agent and Chairman of Board of Directors. George M. LaMonte, 
Deputy Federal Reserve Agent and Vice-Chairman of Board of 
Directors, Bound Brook, N. J. George W. Norris, Philadelphia. 
Director. 

Class "A" — Charles J. Rhoads, Philadelphia, Pa., Group No. 
1. W. H. Peck, Scranton, Pa., Group No. 2. M. J. Murphy, 
Scranton, Pa., Group No. 3. 

Class "B"— Alba B. Johnson, Philadelphia, Pa., Group No. 1. 
Edwin S. Stuart, Philadelphia, Pa., Group No. 2. George W. F. 
Gaunt, Mullica Hill, N. J., Group No. 3. 

Governor, Charles J. Rhoads. 

CLEVELAND DISTRICT NO. 4. 

Class "C"— D. C. Wills, Bellevue, Pa., Federal Reserve Agent 
and Chairman of Board of Directors. Lyman H. Treadway, Cleve- 
land, Ohio, Deputy Federal Reserve Agent and Vice-Chairman of 
Board of Directors. H. P. Wolfe, Columbus, Ohio, Director. 

Class "A"— Robert Wardrop, Pittsburgh, Pa., Group No 1. 
W. S. Rowe, Cincinnati, Ohio, Group No. 2. S. B. Rankin, South 
Charleston, Ohio, Group No. 3. 

Class "B" — Thomas A. Combs, Lexington, Ky., Group No. 1. 

C. H. Bagley, Corry, Pa., Group No. 2. A. B. Patrick, Salyerville, 
Ky., Group No. 3. 

Governor j E. R. Fancher. 

RICHMOND — DISTRICT NO. 5. 

Class "C"— William Ingle, Baltimore, Federal Reserve Agent 
and Chairman of Board of Directors. James A. Moncure, Rich- 
mond, Deputy Federal Reserve Agent and Vice-Chairman of Board of 
Directors. M. F. H. Gouverneur, Wilmington, N. C, Director. 

Class "A"— Waldo Newcomer, Baltimore, Md., Group No. 1. 
John F. Bruton, Wilson, N. C, Group No. 2. Edwin Mann, Blue- 
held, W. Va., Group No. 3. 

Class "B" — George J. Seay, Richmond, Va., Group No. 1. 

D. R. Coker, Hartsville, S. C, Group No. 2. J. F. Oyster, Wash- 
ington, D. C, Group No. 3. 

Governor, George J. Seay. 

ATLANTA DISTRICT NO. 6. 

Class "C" — M. B. Wellborn, Anniston, Ala., Federal 
Reserve Agent and Chairman of Board of Directors. Edward T. 
Brown, Atlanta, Ga., Deputy Federal Reserve Agent and Vice- 
Chairman of Board of Directors. W. H. Kettig, Birmingham, Ala., 
Director. 

Class "A"— L. P. Hillyer, Macon, Ga., Group No. 1. F. W. 
Fotte, Hattiesburg, Miss., Group No. 2. W. H. Toole, Winder, 
Ga., Group No. 3. 

Class "B" — P. H. Saunders, New Orleans, La., Group No. 1. 
J. A. McCrary, Decatur, Ga., Group No. 2. W. H. Hartford, 
Nashville, Tenn., Group No. 3. 

Governor, Joseph A. McCord. 



THE FEDERAL RESERVE ACT. 149 

CHICAGO DISTRICT NO. 7. 

Class "C"— C. H. Bosworth, Chicago, 111., Federal Reserve 
Agent and Chairman of Board of Directors. W. L. McLallcn, 
Columbia City, Ind., Deputy Federal Reserve Agent and Vice- 
Chairman of Board of Directors. Edwin T. Meredith, Des Moines, 
Iowa, Director. 

Class "A" — George M. Reynolds, Chicago, 111., Group No. 1. 
J. B. Forgan, Chicago, 111., Group No. 2. E. L. Johnson, Waterloo, 
Iowa, Group No. 3. 

Class "B"— Henry B. Joy, Detroit, Mich., Group No. 1. 
M. B. Hutchison, Ottumwa, Iowa, Group No. 2. A. H. Vogel, 
Milwaukee, Wisconsin, Group No. 3. 

Governor, M. B. McDougal. 

ST. LOUIS DISTRICT NO. 8. 

Class "C"— William McC. Martin, St. Louis, Federal Reserve 
Agent and Chairman of Board of Directors. Walter W. Smith, St. 
Louis, Deputy Federal Reserve Agent and Vice-Chairman of Board- 
of Directors. John Boehne, Evansville, Ind., Director. 

Class "A"— Walker Hill, St. Louis, Mo., Group No. 1. F. O. 
Watts, St. Louis, Mo., Group No. 2. Oscar Fenley, Louisville, 
Ky., Group No. 3. 

Class "B" — Murray Carlton, St. Louis, Mo., Group No. 1. 
W. B. Plunkett, Little Rock, Ark., Group No. 2. LeRoy Percy, 
Greenville, Miss., Group No. 3. 

Governor, Rolla Wells. 

-MINNEAPOLIS DISTRICT NO. 9. 

Class "C" — John F. Rich, Red Wing, Minn., Federal Reserve 
Agent and Chairman of Board of Directors. P. M. Kerst, St. 
Paul, Deputy Federal Reserve A^ent and Vice-Chairman of Board of 
Directors. John W. Black, Houghton, Mich., Director. 

Class "A" — E. W. Decker, Minneapolis, Minn., Group No. 1. 
L. B. Hanna, Fargo, N. D., Group No. 2. J. C. Bassett, Aberdeen, 
S. D., Group No. 3. 

Class "B"— F. R. Bigelow, St. Paul, Minn., Group No. 1. 
F. P. Hixon, LaCrosse, Wisconsin, Group No. 2. Norman B. 
Holter, Helena, Montana, Group No. 3. 

Governor, Theodore Wold. 

KANSAS CITY DISTRICT NO. 10. 

Class "C"— J. Z. Miller, Kansas City, Mo., Federal Reserve 
Agent and Chairman of Board of Directors. A. E. Ramsey, Musko- 
gee, Okla, Deputy Federal Reserve Agent and Vice-Chairman of 
Board of Directors. R. H. Malone, Denver, Colorado, Director. 

Class "A" — Gordon Jones, Denver, Colorado, Group No. 1. 
W. J. Bailey, Atchison, Kans., Group No. 2. C. E. Burnham, 
Norfolk, Nebraska, Group No. 3. 

Class "B" — M. L. McClure, Kansas City, Mo., Group No. 1. 
T. C. Byrne, Omaha, Nebraska, Group No. 2. L. A. Wilson, El 
Reno, Oklahoma, Group No. 3. 

Governor, Cbariea M. Sawyer. 



150 THE FEDERAL RESERVE ACT. 



DALLAS DISTRICT NO. 11. 

Class "C" — E. O. Tennison, Dallas, P'ederal Reserve Agent and 
Chairman of Board of Directors. W. F. McCaleb, San Antonio, 
Deputy Federal Reserve Agent and Vice-Chairman of Board of 
Directors. Felix Martinez, El Paso, Texas, Director. 

Class "A" — Oscar Wells, Houston, Texas, Group No. 1. E. K. 
Smith, Shreveport, La., Group No. 2. B. A. McKinney, Durant, 
Oklahoma, Group No. 3. 

Class "B" — Marion Sansom, Fort Worth, Texas, Group No. 1. 
Frank Kell, Wichita Falls, Texas, Group No. 2. J. J. Culbertson, 
Paris, Texas, Group No. 3. 

Governor, Oscar Wells. 

SAN FRANCISCO DISTRICT NO. 12. 

Class "C" — John Perrin, Pasadena, Cal., Federal Reserve 
Agent and Chairman of Board of Directors. Claude Gatch, San 
Francisco, Cal., Deputy Federal Reserve Agent and Vice-Chairman 
of Board of Directors. Charles E. Peabody, Seattle, Wash., Direc- 
tor. 

Class "A" — C. K. Mcintosh, San Francisco, Cal., Group No. 1. 
James K. Lynch, San Francisco, Cal., Group No. 2. Alden Ander- 
son, Sacramento, Cal., Group No. 3. 

Class "B" — A. B. C. Dohrman, San Francisco, Cal., Group No. 
1. J. A. McGregor, San Francisco, Cal., Group No. 2. Elmer H. 
Cox, Madera, Cal., Group No. 3. 

Governor, Archibald Kains. 



PART III. 

STATUTES. 
THE FEDERAL RESERVE ACT. 



[Public — No. 43 — 63d Congress.] 
[H. R. 7837.] 



An Act To provide for the establishment of Federal reserve banks, to 
furnish an elastic currency, to afford means of rediscounting commercial paper, 
to establish a more effective supervision of banking in the United States, and 
for other purposes. 

Be it enacted by the Senate and House of Representatives of% 
the United States ofAmericain Congress assembled, That the short 
title of this Act shall be the "Federal Reserve Act." 

Wherever the word "bank" is used in this Act, the word " 
shall be held to include State bank, banking association, and trust 
company, except where national banks or Federal reserve banks are 
specifically referred to. 

The terms "national bank" and "national banking associa- ^f 
tion" used in this Act shall be held to be synonymous and inter- 
changeable. The term "member bank" shall be held to mean any 
national bank, State bank, or bank or trust company which has be- 
come a member of one of the reserve banks created by this Act. 
The term "board" shall be held to mean Federal Reserve Board; 
the term "district" shall be held to mean Federal reserve district; 
the term "reserve bank" shall be held to mean Federal reserve 
bank. 

FEDERAL RESERVE DISTRICTS. 

Sec. 2. As soon as practicable, the Secretary of the Treasury, If 
the Secretary of Agriculture and the Comptroller of the Currency, 
acting as "The Reserve Bank Organization Committee," shall 
designate not less than eight nor more than twelve cities to be known 
as Federal reserve cities, and shall divide the continental United 
States, excluding Alaska, into districts, each district to contain only 
one of such Federal reserve cities. The determination of said or- 
ganization committee shall not be subject to review except by the 
Federal Reserve Board when organized: Provided, That the dis- 
tricts shall be apportioned with due regard to the convenience and 
customary course of business and shall not necessarily be cotermin- 



152 THE FEDERAL RESERVE ACT. 

ous with any State or States. The districts thus created may In- 
readjusted and new districts may from time to time be created by the 
Federal Reserve Board, not to exceed twelve in all. Such districts 
shall be known as Federal reserve districts and may be designated by 
number. A majority of the organization committee shall constitute 
a quorum with authority to act. 

Said organization committee shall be authorized to employ % 5 
counsel and expert aid, to take testimony, to send for persons and 
papers, to administer oaths, and to make such investigation as may 
be deemed necessary by the said committee in determining the re- 
serve districts and in designating the cities within such districts 
where such Federal reserve banks shall be severally located. The 
said committee shall supervise the organization in each of the cities 
designated of a Federal reserve bank, which shall include in its title 
the name of the city in which it is situated, as "Federal Reserve 
Bank of Chicago." 

Under regulations to be prescribed by the organization com- ^[ 6 
mittee, every national banking association in the United States is 
hereby required, and every eligible bank in the United States and 
every trust company within the District of Columbia, is hereby 
authorized to signify in writing, within sixty days after the passage 
of this Act, its acceptance of the terms and provisions hereof. When 
the organization committee shall have designated the cities in which 
Federal reserve banks are to be organized, and fixed the geographical 
limits of the Federal reserve districts, every national banking as- 
sociation within that district shall be required within thirty days 
after notice from the organization committee, to subscribe to the 
capital stock of such Federal reserve bank in a sum equal to six per 
centum of the paid-up capital stock and surplus of such bank, one- 
sixth of the subscription to be payable on call of the organization 
committee or of the Federal Reserve Board, one-sixth within three 
months and one-sixth within six months thereafter, and the remain- 
der of the subscription, or any part thereof, shall be subject to call 
when deemed necessary by the Federal Reserve Board, said pay- 
ments to be in gold or gold certificates. 

The shareholders of every Federal reserve bank shall be held If 7 
individually responsible, equally and ratably, and not one for an- 
other, for all contracts, debts and engagements of such bank to the 
extent of the amount of their subscriptions to such stock at the 
par value thereof in addition to the amount subscribed, whether 
such subscriptions have been paid up in whole or in part, under the 
provisions of this Act. 

Any national bank failing to signify its acceptance of the ^[ 8 



THE FEDERAL RESERVE ACT. 153 

terms of this Act within the sixty days aforesaid, shall cease to act 
as a reserve agent, upon thirty days' notice, to be given within the 
discretion of the said organization committee or of the Federal Re- 
serve Board . 

Should any national banking association in the United States ^f 9 
now organized fail within one year after the passage of this Act to 
become a member bank or fail to comply with any of the provisions 
of this Act applicable thereto, all of the rights, privileges, and 
franchises of such association granted to it under the national bank 
Act, or under the provisions of this Act, shall be thereby forfeited. 
Any noncompliance with or violation of this Act shall, however, be 
determined and adjudged by any court of the United States of com- 
petent jurisdiction in a suit brought for that purpose in the district 
or territory in which such bank is located, under direction of the 
Federal Reserve Board, by the Comptroller of the Currency in his 
own name before the association shall be declared dissolved. In 
cases of such noncompliance or violation, other than the failure to 
become a member bank under the provisions of this Act, every direc- 
tor who participated in or assented to the same shall be held liable 
in his personal or individual capacity for all damages which said bank, 
its shareholders, or any other person shall have sustained in conse- 
quence of such violation. 

Such dissolution shall not take away or impair any remedy ^f 10 
against such corporation, its stockholders or officers, for any liability 
or penalty which shall have been previously incurred. 

Should the subscriptions by banks to the stock of said Federal ^[ 11 
reserve banks or any one or more of them be, in the judgment of 
the organization committee, insufficient to provide the amount of 
capital required therefor, then and in that event the said organiza- 
tion committee may, under conditions and regulations to be pre- 
scribed by it, offer to public subscription at par such an amount of 
stock in said Federal reserve banks, or any one or more of them, as 
said committee shall determine, subject to the same conditions as to 
payment and stock liability as provided for member banks. 

No individual, copartnership, or corporation other than a " 12 
member bank of its district shall be permitted to subscribe for or to 
hold at any time more than S2o,000 par value of stock in any Federal 
reserve bank. Such stock shall be known as public stock and may 
be transferred on the books of the Federal reserve bank by the chair- 
man of the board of directors of such bank. 

Should the total subscriptions by banks and the public to ^[ 13 
the stock of said Federal reserve banks, or any one or more of them 
be, in the judgment of the organization committee, insufficient to 



154 THE FEDERAL RESERVE ACT. 

provide the amount of capital required therefor, then and in that 
event the said organization committee shall allot to the United States 
such an amount of said stock as said committee shall determine . 
Said United States stock shall be paid for at par out of any money 
in the Treasury not otherwise appropriated, and shall be held by the 
Secretary of the Treasury and disposed of for the benefit of the 
United States in such manner, at such times, and at such price, not 
less than par, as the Secretary of the Treasury shall determine. 

Stock not held by member banks shall not be entitled to ^f 14 
voting power. 

The Federal Reserve Board is hereby empowered to adopt If 15 
and promulgate rules and regulations governing the transfers of said 
stock. 

No Federal reserve bank shall commence business with a If 16 
subscribed capital less than $4,000,000. The organization of reserve 
districts and Federal reserve cities shall not be construed as chang- 
ing the present status of reserve cities and central reserve cities, 
except in so far as this Act changes the amount of reserves that may 
be carried with approved reserve agents located therein. The 
organization committee shall have power to appoint such assistants 
and incur such expenses in carrying out the provisions of this Act as 
it shall deem necessary, and such expenses shall be payable by the 
Treasurer of the United States upon voucher approved by the Secre- 
tary of the Treasury, and the sum of $100,000, or so much thereof 
as may be necessary, is hereby appropriated, out of any moneys in 
the Treasury not otherwise appropriated, for the payment of such 
expenses. 

BRANCH OFFICES. 

Sec. 3. Each Federal reserve bank shalj establish branch banks 1f 17 
within the Federal reserve district in which it is located and may do 
so in the district of any Federal reserve bank which may have been 
suspended. Such branches shall be operated by a board of directors 
under rules and regulations approved by the Federal Reserve Board. 
Directors of branch banks shall possess the same qualifications as 
directors of the Federal reserve banks. Four of said directors shall 
be selected by the reserve bank and three by the Federal Reserve 
Board, and they shall hold office during the pleasure, respectively, 
of the parent bank and the Federal Reserve Board. The reserve 
bank shall designate one of the directors as manager. 



THE FEDERAL RESERVE ACT. 155 



KKDERAL RESERVE BANKS. 

Sec. 4. When the organization committee shall have es- ^[ 18 
tablished Federal reserve districts as provided in section two of this 
A.ct, a certificate shall be filed with the Comptroller of the Currency 
showing the geographical limits of such districts and the Federal 
reserve city designated in each of such districts. The Comptroller 
of the Currency shall thereupon cause to be forwarded to each na- 
tional bank located in each district, and to such other banks declared 
to be eligible by the organization committee which may apply there- 
for, an application blank in form to be approved by the organiza- 
tion committee, which blank shall contain a resolution to be adopted 
by the board of directors of each bank executing such application, 
authorizing a subscription to the capital stock of the Federal reserve 
bank organizing in that district in accordance with the provisions of 
this Act. 

When the minimum amount of capital stock prescribed by % 19 
this Act for the organization of any Federal reserve bank shall have 
been subscribed and allotted, the organization committee shall 
designate any five banks of those whose applications have been re- 
ceived, to execute a certificate of organization, and thereupon the 
banks so designated shall, under their seals, make an organization 
certificate which shall specifically state the name of such Federal 
reserve bank, the territorial extent of the district over which the 
operations of such Federal reserve bank are to be carried on, the city 
and State in which said bank is to be located, the amount of capital 
stock and the number of shares into which the same is divided, the 
name and place of doing business of each bank executing such certi- 
ficates, and of all banks which have subscribed to the capital stock 
of such Federal reserve bank and the number of shares subscribed 
by each, and the fact that the certificate is made to enable those banks 
executing same, and all banks which have subscribed or may there- 
after subscribe to the capital stock of such Federal reserve bank, to 
avail themselves of the advantages of this Act. 

The said organization certificate shall be acknowledged be- If 20 
fore a judge of some court of record or notary public; and shall be, 
together with the ackowledgment thereof, authenticated by the seal 
of such court, or notary, transmitted to the Comptroller of the Cur- 
rency, who shall file, record and carefully preserve the same in his 
office. 

Upon the filing of such certificate with the Comptroller of H 21 
the Currency as aforesaid, the said Federal reserve bank shall be- 



\ 



156 THE FEDERAL RESERVE ACT. 

oome a body corporate and as such, and in the name designated in 
such organization certificate, shall have power — 

First. To adopt and use a corporate seal. " '22 

Second. To have succession for a period of twenty years % 23 
from its organization unless it is sooner dissolved by an Act of Con- 
gress, or unless its franchise becomes forfeited by some violation of 
law. 

Third. To make contracts. * J 1 

Fourth. To sue and be sued, complain and defend, in ' 26 
any court of law or equity. 

Fifth. To appoint by its board of directors, such officers ^j 26 
and employees as are not otherwise provided for in this Act, to define 
their duties, require bonds of them and fix the penalty thereof, and 
to dismiss at pleasure such officers or employees. 

Sixth. To prescribe by its board of directors, by-laws not ^[ 27 
inconsistent with law, regulating the manner in which its general 
business may be conducted, and the privileges granted to it by law 
may be exercised and enjoyed. 

Seventh. To exercise by its board of directors, or duly H 28 
authorized officers or agents, all powers specifically granted by the 
provisions of this Act and such incidental powers as shall be neces- 
sary to carry on the business of banking within the limitations pre- 
scribed by this Act. 

Eighth. Upon deposit with the Treasurer of the United ^[ 29 
States of any bonds of the United States in the manner provided by 
existing law relating to national banks, to receive from the Comp- 
troller of the Currency circulating notes in blank, registered and 
countersigned as provided by law, equal in amount to the par value 
of the bonds so deposited, such notes to be issued under the same 
conditions and provisions of law as relate to the issue of circulating 
notes of national banks secured by bonds of the United States bearing 
the circulating privilege, except that the issue of such notes shall 
not be limited to the capital stock of such Federal reserve bank. 

' But no Federal reserve bank shall transact any business ^| 30 
except such as is incidental and necessarily preliminary to its organi- 
zation until it has been authorized by the Comptroller of the Currency 
to commence business under the provisions of. this Act. 
>. Every Federal reserve bank shall be conducted under the ^| 31 
supervision and control of a board of directors. 

The board of directors shall perform the duties usually ap- 1f 32 
pertaining to the office of directors of banking associations and all 
such duties as are prescribed by law. 

Said board shall administer the affairs of said bank fairly 1[ 33 



THE FEDERAL RESERVE ACT. 157 

and impartially and without discrimination in favor of or against 
any member bank or banks and shall, subject to the provisions of 
law and the orders of the Federal Reserve Board, extend to each 
member bank such discounts, advancements and accommodations 
as may be safely and reasonably made with due regard for the claims 
and demands of other member banks. 

Such board of directors shall be selected as hereinafter ^| 34 
specified and shall consist of nine members, holding office for three 
years, and divided into three classes, designated as classes A, B, 
and C. 

Class A shall consist of three members, who shall be chosen ^[ 35 
by and be representative of the stock-holding banks. 

Class B shall consist of three members, who at the time of ' 36 
their election shall be actively engaged in their district in commerce, 
agriculture or some other industrial pursuit. 

Class C shall consist of three members who shall be desig- ^f 37 
nated by the Federal Reserve Board. When the necessary subscrip- 
tions to the capital stock have been obtained for the organization of 
any Federal reserve bank, the Federal Reserve Board shall appoint 
the class C directors and shall designate one of such directors as 
chairman of the board to be selected. Pending the designation of 
such chairman, the organization committee shall exercise the powers 
and duties appertaining to the office of chairman in the organiza- 
tion of such Federal reserve bank. 

Xo Senator or Representative in Congress shall be a member ^i 38 
of the Federal Reserve Board or an officer or a director of a Federal 
reserve bank. 

No director of class B shall be an officer, director, or em- • 39 
ployee of any bank. 

No director of class C shall be an officer, director, employee, • 40 
or stockholder of any bank. 

Directors of class A and class B shall be chosen in the follow- * 41 
ing manner: 

The chairman of the board of directors of the Federal reserve * 42 
bank of the district in which the bank is situated or, pending the 
appointment of such chairman, the organization committee shall 
classify the member banks of the district into three general groups 
or divisions. Each group shall contain as nearly as may be one-third 
of the aggregate number of the member banks of the district and shall 
consist, as nearly as may be, of banks of similar capitalization. 
The groups shall be designated by number by the chairman. 

At a regularly called meeting of the board of directors of • 43 
each member bank in the district it shall elect by ballot a district 



l.Vs THE FEDERAL RESERVE ACT. 

reserve elector and shall certify his name to the chairman of the 
board of directors of the Federal reserve bank of the district. The 
chairman shall make lists of the district reserve electors thus named 
by banks in each of the aforesaid three groups and shall transmit 
one list to each elector in each group. 

Each member bank shall be permitted to nominate to the If 44 
chairman one candidate for director of class A and one candidate for 
director of class B. The candidates so nominated shall be listed by 
the chairman, indicating by whom nominated, and a copy of said list 
shall, within fifteen days after its completion, be furnished by the 
chairman to each elector. 

Every elector shall, within fifteen days after the receipt of • 4"> 
the said list, certify to the chairman his first, second, and other 
choices of a director of class A and class B, respectively, upon a put 
erential ballot, on "a form furnished by the chairman oi the board oi 
directors of the Federal reserve bank of the district. Each elector 
shall make a cross opposite the name of the first, second, and other 
choices for a director of class A and for a director of cla.«s B, but shall 
not vote more than one choice for any one candidate. 

Any candidate having a majority of all votes cast in the If 46 
column of first choice shall be declared elected. If no candidate 
have a majority of all the votes in the first column, then there shall 
be added together the votes cast by the electors for such candidates 
in the second column and the votes cast for the several candidates 
in the first column. If any candidate then have a majority of the 
electors voting, by adding together the first and second choices, he 
shall be declared elected. If no candidate have a majority of elec- 
tors voting when the first and second choices shall have been added, 
then the votes cast in the third column for other choices shall be 
added together in like manner, and the candidate then having the 
highest number of votes shall be declared elected. An immediate 
report of election shall be declared. 

Class C directors shall be appointed by the Federal Reserve 1f 47 
Board. They shall have been for at least two years residents of the 
district for which they are appointed, one of whom shall be designated 
by said board as chairman of the board of directors of the Federal 
reserve bank and as "Federal reserve agent." He shall be a person 
of tested banking experience; and in addition to his duties as chair- 
man of the board of directors of the Federal reserve bank he shall be 
required to maintain under regulations to be established by the 
Federal Reserve Board a local office of said board on the premises 
of the Federal reserve bank. He shall make regular reports to the 
Federal Reserve Board, and shall act as its official representative 



THE FEDERAL RESERVE ACT. 159 

for the performance of the functions conferred upon it by this Act. 
He shall receive an annual compensation to be fixed by the Federal 
Reserve Board and paid monthly by the Federal reserve bank to 
which he is designated. One of the directors of class C, who shall 
be a person of tested banking experience, shall be appointed by the 
Federal Reserve Board as deputy chairman and deputy Federal 
reserve agent to exercise the powers of the chairman of the board 
and Federal reserve agent in case of absence or disability of his 
principal. 

Directors of Federal reserve banks shall receive, in addi- 1f 48 
tion to any compensation otherwise provided, a reasonable allow- 
ance for necessary expenses in attending meetings of their respective 
boards, which amount shall be paid by the respective Federal reserve 
banks. Any compensation that may be provided by boards of 
directors of Federal reserve banks for directors, officers or employees 
shall be subject to the approval of the Federal Reserve Board. 

The Reserve Bank Organization Committee may, in organiz- *[ 49 
ing Federal reserve banks, call such meetings of bank directors in 
the several districts as may be necessary to carry out the purposes 
of this Act, and may exercise the functions herein conferred upon the 
chairman of the board of directors of each Federal reserve bank 
pending the complete organization of such bank. 

At the first meeting of the full board of directors of each ^[ 50 
Federal reserve bank, it shall be the duty of the directors of classes A, 
B and C, respectively, to designate one of the members of each class 
whose term of office shall expire in one year from the first of January 
nearest to date of such meeting, one whose term of office shall expire 
at the end of two years from said date, and one whose term of office 
shall expire at the end of three years from said date. Thereafter 
every director of a Federal reserve bank chosen as hereinbefore pro- 
vided shall hold office for a term of three years. Vacancies that may 
occur in the several classes of directors of Federal reserve banks may 
be filled in the manner provided for the original selection of such 
directors, such appointees to hold office for the unexpired terms of 
their predecessors. 

stock issues; increase and decrease of capital. 

Sec 5. The capital stock of each Federal reserve bank shall be ^f 51 
divided into shares of $100 each. The outstanding capital stock 
shall be increased from time to time as member banks increase their 
capital stock and surplus or as additional banks become members, 
and may be decreased as member banks reduce their capital stock or 



160 THE FEDERAL RESERVE ACT. 

surplus or cease to be members, shares of the capital stock of 
Federal reserve banks owned by member banks shall not be trans- 
ferred or hypothecated. When a member bank increases its capi- 
tal stock or surplus, it shall thereupon subscribe for an additional 
amount of capital stock of the Federal reserve bank of its district 
equal to six per centum of the said increase, one-half of said sub- 
scription to be paid in the manner hereinbefore provided for original 
subscription, and one-half subject to call of the Federal Reserve 
Board. A bank applying for stock in a Federal reserve bank at any- 
time after the organization thereof must subscribe for an amount of 
the capital stock of the Federal reserve bank equal to six per centum 
of the paid-up capital stock and surplus of said applicant bank, pay- 
ing therefor its par value plus one-half of one per centum a month 
from the period of the last dividend. When the capital stock of any 
Federal reserve bank shall have been increased either on account of 
the increase of capital stock of member banks or on account of the 
increase in the number of member banks, the board of directors shall 
cause to be executed a certificate to the Comptroller of the Currency 
showing the increase in capital stock, the amount paid in, and by 
whom paid. When a member bank reduces its capital stock it shall 
surrender a proportionate amount of its holdings in the capital of 
said Federal reserve bank, and when a member bank voluntarily 
liquidates it shall surrender all of its holdings of the capital stock 
of said Federal reserve bank and be released from its stock subscrip- 
tion not previously called. In either case the shares surrendered 
shall be canceled and the member bank shall receive in payment 
therefor, under regulations to be prescribed by the Federal Reserve 
Board, a sum equal to its cash-paid subscriptions on the shares sur- 
rendered and one-half of one per centum a month from the period of 
the last dividend, not to exceed the book value thereof, less any 
liability of such member bank to the Federal reserve bank. 

Sec. 6. If any member bank shall be declared insolvent and a •[ 52 
receiver appointed therefor, the stock held by it in said Federal 
reserve bank shall be canceled, without impairment of its liability, 
and all cash-paid subscriptions on said stock, with one-half of one per 
centum per month from the period of last dividend, not to exceed 
the book value thereof, shall be first applied to all debts of the insolv- 
ent member bank to the Federal reserve bank, and the balance, if 
any, shall be paid to the receiver of the insolvent bank. Whenever 
the capital stock of a Federal reserve bank is reduced, either on ac- 
count of a reduction in capital stock of any member bank or of the 
liquidation or insolvency of such bank, the board of directors shall 
cause to be executed a certificate to the Comptroller of the Currency 



THE FEDERAL RESERVE ACT. 161 

showing such reduction of capital stock and the amount repaid to 
such bank. 

DIVISION OP EARNINGS. 

Sec. 7. After all necessary expenses of a Federal reserve ^[ 53 
bank have been paid or provided for, the stockholders shall be en- 
titled to receive an annual dividend of six per centum on the paid-in 
capital stock, which dividend shall be cumulative. After the afore- 
said dividend claims have been fully met, all the net earnings shall be 
paid to the United States as a franchise tax, except that one-half of 
such net earnings shall be paid into a surplus fund until it shall 
amount to forty per centum of the paid-in capital stock of such 
bank. 

The net earnings derived by the United States from Federal *[ 54 
reserve banks shall, in the discretion of the Secretary, be used to 
supplement the gold reserve held against outstanding United States 
notes, or shall be applied to the reduction of the outstanding bonded 
indebtedness of the United States under regulations to be prescribed 
by the Secretary of the Treasury. Should a Federal reserve bank 
be dissolved or go into liquidation, any surplus remaining, after the 
payment of all debts, dividend requirements as hereinbefore provided, 
and the par value of the stock, shall be paid to and become the prop- 
erty of the United States and shall be similarly applied. 

Federal reserve banks, including the capital stock and sur- ^f 55 
plus therein, and the income derived therefrom shall be exempt from 
Federal, State, and local taxation, except taxes upon real estate. 

Sec. 8. Section fifty-one hundred and fifty-four, United States ^[ 56 
Revised Statutes, is hereby amended to read as follows: 

Any bank incorporated by special law of any State or of the ^f 57 
United States or organized under the general laws of any State or of 
the United States and having an unimpaired capital sufficient to 
entitle it to become a national banking association under the pro- 
visions of the existing laws may, by the vote of the shareholders 
owning not less than fifty-one per centum of the capital stock of 
such bank or banking association, with the approval of the Comp- 
troller of the Currency, be converted into a national banking associa- 
tion, with any name approved by the Comptroller of the Currency: 

Provided, however, That said conversion shall not be in contra- ^ 58 
vcntion of the State law. In such case articles of association and 
organization certificate may be executed by a majority of the direc- 
tors of the bank or banking institution, and the certificate shall de- 
clare that the owners of fifty-one per centum of the capital stock have 
authorized the directors to make such certificate and to change or 



162 THE FEDERAL RESERVE ACT. 

convert the bank or banking institution into a national association. 
A majority of the directors, after executing the articles of association 
and the organization certificate, shall have power to execute all other 
papers and to do whatever may be required to make its organization 
perfect and complete as a national association. The shares of any 
such bank may continue to be for the same amount each as they 
were before the conversion, and the directors may continue to be 
directors of the association until others are elected or appointed in 
accordance with the provisions of the statutes of the United States. 
When the Comptroller has given to such bank or banking association 
a certificate that the provisions of this Act have been complied with, 
such bank or banking association, and all its stockholders, officers, 
and employees, shall have the same powers and privileges, and shall 
be subject to the same duties, liabilities, and regulations, in all re- 
spects, as shall have been prescribed by the Federal Reserve Act and 
by the national banking Act for associations originally organized as 
national banking associations. 

STATE BANKS AS MEMBERS. 

Sec. 9. Any bank incorporated by special law of any State, ^| 59 
or organized under the general laws of any State or of the United 
States, may make application to the reserve bank organization 
committee, pending organization, and thereafter to the Federal 
Reserve Board for the right to subscribe to the stock of the Federal 
reserve bank organized or to be organized within the Federal reserve 
district w T here the applicant is located. The organization committee 
or the Federal Reserve Board, under such rules and regulations as 
it may prescribe, subject to the provisions of this section, may per- 
mit the applying bank to become a stockholder in the Federal reserve 
bank of the district in which the applying bank is located. When- 
ever the organization committee or the Federal Reserve Board 
shall permit the applying bank to become a stockholder in the Federal 
reserve bank of the district, stock shall be issued and paid for under 
the rules and regulations in this Act provided for national banks 
which become stockholders in Federal reserve banks. 

The organization committee or the Federal Reserve Board * 60 
shall establish by-laws for the general government of its conduct in 
acting upon applications made by the State banks and banking as- 
sociations and trust companies for stock ownership in Federal re- 
serve banks. Such by-laws shall require applying banks not or- 
ganized under Federal law to comply with the reserve and capital 
requirements and to submit to the examination and regulations pre- 
scribed by the organization committee or by the Federal Reserve 



THE FEDERAL RESERVE ACT. 163 

Board. Xo applying bank shall be admitted to membership in a 
Federal reserve bank unless it possesses a paid-up unimpaired capital 
sufficient to entitle it to become a national banking association in the 
place where it is situated, under the provisions of the national bank- 
ing Act. 

Any bank becoming a member of a Federal reserve bank un- " 61 
der the provisions of this section shall, in addition to the regulations 
and restrictions hereinbefore provided, be required to conform to the 
provisions of law imposed on the national banks respecting the 
limitation of liability which may be incurred by any person, firm, or 
corporation to such banks, the prohibition against making purchase 
of or loans on stock of such banks, and the withdrawal or impairment 
of capital, or the payment of unearned dividends, and to such rules 
and regulations as the Federal Reserve Board may, in pursuance 
thereof, prescribe. 

Such banks, and the officers, agents, and employees thereof, ^[ 62 
shall also be subject to the provisions of and to the penalties pre- 
scribed by sections fifty-one hundred and ninety-eight, fifty-two 
hundred, fifty-two hundred and one, and fifty-two hundred and eight, 
and fifty-two hundred and nine of the Revised Statutes. The mem- 
ber banks shall also be required to make reports of the conditions and 
of the payments of dividends to the comptroller, as provided in 
sections fifty-two hundred and eleven and fifty-two hundred and 
twelve of the Revised Statutes, and shall be subject to the penalties 
prescribed by section fifty-two hundred and thirteen for the failure 
to make such report. 

If at any time it shall appear to the Federal Reserve Board ^[ 63 
that a member bank has failed to comply with the provisions of this 
section or the regulations of the Federal Reserve Board, it shall be 
within the power of the said board, after hearing, to require such 
bank to surrender its stock in the federal reserve bank; upon such 
surrender the Federal reserve bank shall pay the cash-paid subscrip- 
tions to the said stock with interest at the rate of one-half of one per 
centum per month, computed from the last dividend, if earned, not 
to exceed the book value thereof, less any liability to said Federal 
reserve bank, except the subscription liability not previously called, 
which shall be canceled, and said Federal reserve bank shall, upon 
notice from the Federal Reserve Board, be required to suspend said 
bank from further privileges of membership, and shall within thirty 
days of such notice cancel and retire its stock and make payment 
therefor in the manner herein provided. The Federal Reserve 
Board may restore membership upon due proof of compliance with 
the conditions imposed by this section. 



164 THE FEDERAL RESERVE ACT. 



FEDERAL RESERVE BOARD. 

Sec. 10. A Federal Reserve Board is hereby created which ■ 64 
shall consist of seven members, including the Secretary of the Treas- 
ury and the Comptroller of the Currency, who shall be members ex 
officio, and five members appointed by the President of the United 
States, by and with the advice and consent of the Senate. In 
selecting the five appointive members of the Federal Reserve Board. 
not more than one of whom shall be selected from any one Federal 
reserve district, the President shall have due regard to a fair repre- 
sentation of the different commercial, industrial and geographical 
divisions of the country. The five members of the Federal Reserve 
Board appointed by the President and confirmed as aforesaid shall 
devote their entire time to the business of the Federal Reserve 
Board and shall each receive an annual salary of $12,000, payable 
monthly together with actual necessary traveling expenses, and the 
Comptroller of the Currency, as ex officio member of the Federal 
Reserve Board, shall, in addition to the salary now paid him as Comp- 
troller of the Currency, receive the sum of $7000 annually for his 
services as a member of said Board. 

The members of said Board, the Secretary of the Treasury, ^[ 65 
the Assistant Secretaries of the Treasury, and the Comptroller of the 
Currency shall be ineligible during the time they are in office and for 
two years thereafter to hold any office, position, or employment in 
any member bank. Of the five members thus appointed by the 
President at least two shall be persons experienced in banking or 
finance. One shall be designated by the President to serve for two, 
one for four, one for six, one for eight, and one for ten years, and 
thereafter each member so appointed shall serve for a term of ten 
years unless sooner removed for cause by the President. Of the 
five persons thus appointed, one shall be designated by the President 
as governor and one as vice-governor of the Federal Reserve Board. 
The governor of the Federal Reserve Board, subject to its supervision, 
shall be the active executive officer. The Secretary of the Treasury 
may assign offices in the Department of the Treasury for the use of 
the Federal Reserve Board. Each member of the Federal Reserve 
Board shall within fifteen days after notice of appointment make and 
subscribe to the oath of office. 

The Federal Reserve Board shall have power to levy semi- ' 66 
annually upon the Federal reserve banks, in proportion to their capi- 
tal stock and surplus, an assessment sufficient to pay its estimated 
expenses and the salaries of its members and employees for the half 



THE FEDERAL RESERVE ACT. 165 

year succeeding the levying of such assessment, together with any 
deficit carried forward from the preceding half year. 

The first meeting of the Federal Reserve Board shall be held M 67 
in Washington, District of Columbia, as soon as may be after the 
passage of this Act, at a date to be fixed by the Reserve Bank Or- 
ganization Committee. The Secretary of the Treasury shall be ex 
officio chairman of the Federal Reserve Board. No member of the 
Federal Reserve Board shall be an officer or director of any bank, 
banking institution, trust company, or Federal reserve bank nor hold 
stock in any bank, banking institution, or trust company; and be- 
fore entering upon hia duties as a member of the Federal Reserve 
Board he shall certify under oath to the Secretary of the Treasury 
that he has complied with this requirement. Whenever a vacancy 
shall occur, other than by expiration of term, among the five members 
of the Federal Reserve Board appointed by the President, as above 
provided, a successor shall be appointed by the President, with the 
advice and consent of the Senate, to fill such vacancy, and when 
appointed he shall hold office for the unexpired term of the member 
whose place he is selected to fill. 

The President shall have power to fill all vacancies that may 1f 68 
happen on the Federal Reserve Board during the recess of the Senate, 
by granting commissions which shall expire thirty days after the next 
session of the Senate convenes. 

Nothing in this Act contained shall be construed as taking ^[ 69 
away any powers heretofore vested by law in the Secretary of the 
Treasury which relate to the supervision, management, and control of 
the Treasury Department and bureaus under such department, and 
wherever any power vested by this Act in the Federal Reserve 
Board or the Federal reserve agent appears to conflict with the powers 
of the Secretary of the Treasury, such powers shall be exercised sub- 
ject to the supervision and control of the Secretary. 

The Federal Reserve Board shall annually make a full re- ■" 70 
port of its operations to the Speaker of the House of Representatives, 
who shall cause the same to be printed for the information of the 
Congress. 

Section three hundred and twenty-four of the Revised *[ 71 
Statutes of the United States shall be amended so as to read as fol- 
lows: There shall be in the Department of the Treasury a bureau 
charged with the execution of all laws passed by Congress relating 
to the issue and regulation of national currency secured by United 
States bonds and, under the general supervision of the Federal Re- 
serve Board, of all Federal reserve notes, the chief officer of which 
bureau shall be called the Comptroller of the Currency and shall per- 



166 THE FEDERAL RESERVE ACT. 

form his duties under the general directions of the Secretary of t la- 
Treasury. 

Sec. 11. The Federal Reserve Board shall be authorized and * 72 
empowered : 

(a) To examine at its discretion the accounts, books and affairs • 78 
of each Federal reserve bank and of each member bank and to require 
such statements and reports as it may deem necessary. The said 
board shall publish once each week a statement showing the condi- 
tion of each Federal reserve bank and a consolidated statement for all 
Federal reserve banks. Such statements shall show in detail the 
assets and liabilities of the Federal reserve banks, single and com- 
bined, and shall furnish full information regarding the character of 

the money held as reserve and the amount, nature and maturities 
of the paper and other investments owned or held by Federal re- 
serve banks. 

(b) To permit, or, on the affirmative vote of at least five mem- • 74 
bers of the Reserve Board, to require Federal reserve banks to re-dis- 
count the discounted paper of other Federal reserve banks at rates 

of interest to be fixed by the Federal Reserve Board. 

(c) To suspend for a period not exceeding thirty days, and from ■" 75 
time to time to renew such suspension for periods not exceeding 
fifteen days, any reserve requirement specified in this Act: Provided, 
That it shall establish a graduated tax upon the amounts by which 

the reserve requirements of this Act may be permitted to fall below 
the level hereinafter specified: And provided further, That when the 
gold reserve held against Federal reserve notes falls below forty per 
centum, the Federal Reserve Board shall establish a graduated tax of 
not more than one per centum per annum upon such deficiency until 
the reserves fall to thirty-two and one-half per centum, and when 
said reserve falls below thirty-two and one-half per centum, a tax at 
the rate increasingly of not less than one and one-half per centum 
per annum upon each two and one-half per centum or fraction thereof 
that such reserve falls below thirty-two and one-half per centum. 
The tax shall be paid by the reserve bank, but the reserve bank shall 
add an amount equal to said tax to the rates of interest and discount 
fixed by the Federal Reserve Board. 

(d) To supervise and regulate through the bureau under the * 76 
charge of the Comptroller of the Currency the issue and retirement of 
Federal reserve notes, and to prescribe rules and regulations under 
which such notes may be delivered by the Comptroller to the Federal 
reserve agents applying therefor. 

(e) To add to the number of cities classified as reserve and cen- ' 77 
tral reserve cities under existing law in which national banking as- 



THE FEDERAL RESERVE ACT. 167 

sociations are subject to the reserve requirements set forth in section 
twenty of this Act; or to reclassify existing reserve and central 
reserve cities or to terminate their designation as such. 

(f) To suspend or remove any officer or director of any Federal ^[ 78 
reserve hank, the cause of such removal to be forthwith communi- 
cated in writing by the Federal Reserve Board to the removed officer 

or director and to said bank. 

(g) To require the writing off of doubtful or worthless assets ^[ 79 
upon the books and balance sheets of Federal reserve banks. 

(h) To suspend, for the violation of any of the provisions of this ^[ 80 
Apt, the operations of any Federal reserve bank, to take possession 
thereof, administer the same during the period of suspension, and, 
when deemed advisable, to liquidate or reorganize such bank. 

(i) To require bonds of Federal reserve agents, to make regula- ^[ 81 
tions for the safeguarding of all collateral, bonds, Federal reserve 
notes, money or property of any kind deposited in the hands of such 
agents, and said board shall perform the duties, functions, or ser- 
vices specified in this Act, and make all rules and regulations neces- - 
sary to enable said board effectively to perform the same. 

(j) To exercise general supervision over said Federal reserve ^[ 82 
banks. 

(k) To grant by special permit to national banks applying there- ^[ 83 
for, when not in contravention of State or local law, the right to act 
as trustee, executor, administrator, or registrar of stocks and bonds 
under such rules and regulations as the said board may prescribe. 

(1) To employ such attorneys, experts, assistants, clerks, or ^[ 84 
other employees as may be deemed necessary to conduct the business 
of the board. All salaries and fees shall be fixed in advance by said 
board and shall be paid in the same manner as the salaries of the 
members of said board. All such attorneys, experts, assistants, 
clerks, and other employees shall be appointed without regard to the 
provisions of the Act of January sixteenth, eighteen hundred and 
eighty-three (volume twenty-two, United States Statutes at Large, 
page four hundred and three), and amendments thereto, or any rule 
or regulation made in pursuance thereof: Provided, That nothing 
herein shall prevent the President from placing said employees in the 
classified service. 

FEDERAL ADVISORY COUNCIL. 

Sec. 12. There is hereby created a Federal Advisory Coun- If 85 
cil, which shall consist of as many members as there are Federal re- 
serve districts. Each Federal reserve bank by its board of directors 



168 THE FEDERAL RESERVE ACT. 

shall annually select from its own Federal reserve district one member 
of said council, who shall receive such compensation and allowances as 
may be fixed by his board of directors subject to the approval of the 
Federal Reserve Board. The meetings of said advisory council shall 
be held at Washington, District of Columbia, at least four times each 
year, and oftener if called by the Federal Reserve Board. The 
council may in addition to the meetings above provided for hold such 
other meetings in Washington, District of Columbia, or elsewhere, as 
it may deem necessary, may select its own officers and adopt its own 
methods of procedure, and a majority of its members shall constitute 
a quorum for the transaction of business. Vacancies in the council 
shall be filled by the respective reserve banks, and members selected 
to fill vacancies shall serve for the unexpired term. 

The Federal Advisory Council shall have power, by itself or ^f 86 
through its officers, (1) to confer directly with the Federal Reserve 
Board on general business conditions; (2) to make oral or written 
representations concerning matters within the jurisdiction of said 
Board; (3) to call for information and to make recommendations in 
regard to discount rates, re-discount business, note issues, reserve 
conditions in the various districts, the purchase and sale of gold or 
securities by reserve banks, open-market operations by said banks, 
and the general affairs of the reserve banking system. 

POWERS OF FEDERAL RESERVE BANKS. 

Sec. 13. Any Federal reserve bank may receive from any % 87 
of its member banks, and from the United States, deposits of current 
funds in lawful money, national bank notes, Federal reserve notes, or 
checks and drafts upon solvent member banks, payable upon presen- 
tation; or, solely for exchange purposes, may receive from other 
Federal reserve banks deposits of current funds in lawful money, 
national bank notes, or checks and drafts upon solvent member or 
other Federal reserve banks, payable upon presentation. 

Upon the indorsement of any of its member banks, with a ^[ 88 
waiver of demand, notice and protest by such bank, any Federal 
reserve bank may discount notes, drafts, and bills of exchange aris- 
ing out of actual commercial transactions; that is, notes, drafts, 
and bills of exchange issued or drawn for agricultural, industrial, or 
commercial purposes, or the proceeds of which have been used, or 
are to be used, for such purposes, the Federal Reserve Board to have 
the right.to determine or define the character of the paper thus eligible 
for discount, within the meaning of this Act. Nothing in this Act 
contained shall be construed to prohibit such notes, drafts, and bills 



THE FEDERAL RESERVE ACT. 169 

of exchange, secured by staple agricultural products, or other goods, 
wares, or merchandise from being eligible for such discount; but 
such definition shall not include notes, drafts, or bills covering merely 
investments or issued or drawn for the purpose of carrying or trading 
in stocks, bonds or other investment securities, except bonds and 
notes of the Government of the United States. Notes, drafts, and 
bills admitted to discount under the terms of this paragraph must 
have a maturity at the time of discount of not more than ninety days: 
Provided, That notes, drafts, and bills drawn or issued for agricul- 
tural purposes or based on livestock and having a maturity not ex- 
ceeding six months may be discounted in an amount to be limited 
to a percentage of the capital of the Federal reserve bank, to be as- 
certained and fixed by the Federal Reserve Board. 

Any Federal reserve bank may discount acceptances which ^f 89 
are based on the importation or exportation of goods and which have 
a maturity at time of discount of not more than three months, and 
indorsed by at least one member bank. The amount of acceptances 
so discounted shall at no time exceed one-half the paid-up capital 
stock and surplus of the bank for which the re-discounts are made. 

The aggregate of such notes and bills bearing the signature •[ 90 
or indorsement of any one person, company, firm, or corporation re- 
discounted for any one bank shall at no time exceed ten per centum 
of the unimpaired capital and surplus of said bank; but this restric- 
tion shall not apply to the discount of bills of exchange drawn in good 
faith against actually existing values. 

Any member bank may accept drafts or bills of exchange * 91 
drawn upon it and growing out of transactions involving the impor- 
tation or exportation of goods having not more than six months' 
sight to run; but no bank shall accept such bills to an amount equal 
at any time in the aggregate to more than one-half its paid-up capital 
stock and surplus. 

Section fifty-two hundred and two of the Revised Statutes^ 92 
of the United States is hereby amended so as to read as follows: No 
national banking association shall at any time be indebted, or in any 
way liable, to an amount exceeding the amount of its capital stock 
at such time actually paid in and remaining undiminished by losses 
or otherwise, except on account of demands of the nature following: 

First. Notes of circulation. 

Second. Moneys deposited with or collected by the association. 

Third . Bills of exchange or drafts drawn against money actually 
on deposit to the credit of the association, or due thereto. 

Fourth. Liabilities to the stockholders of the association for 
dividends and reserve profits. 



17(> THE FEDERAL RESERVE ACT. 

Fifth. Liabilities incurred under the provisions of the Federal 
Reserve Aet. 

The re-diseount by any Federal reserve bank of any bills ^f 93 
receivable and of domestic and foreign bills of exchange, and of ac- 
ceptances authorized by this Act, shall be subject to such restric- 
tions, limitations, and regulations as may be imposed by the Federal 
Reserve Board. 

OPEN-MARKET OPERATIONS. 

Sec. 14. Any Federal reserve bank may, under rules and " !)4 
regulations prescribed by the Federal Reserve Board, purchase and 
sell in the open market, at home or abroad, either from or to domes- 
tic or foreign banks, firms, corporations, or individuals, cable trans- 
fers and bankers' acceptances and bills of exchange of the kinds and 
maturities by this Act made eligible for re-discount, with or without 
the indorsement of a member bank. 

Every Federal reserve bank shall have power: • !i.~, 

(a) To deal in gold coin and bullion at home or abroad, to make * 96 
loans thereon, exchange Federal reserve notes for gold, gold coin, or 
gold certificates, and to contract for loans of gold coin or bullion, giv- 
ing therefor, when necessary, acceptable security, including the hy- 
pothecation of United States bonds or other securities which Federal 
reserve banks are authorized to hold; 

(b) To buy and sell, at home or abroad, bonds and notes of the ^f 97 
United States, and bills, notes, revenue bonds, and warrants with a 
maturity from date of purchase of not exceeding six months, issued 

in anticipation of the collection of taxes or in anticipation of the 
receipt of assured revenues by any State, county, district, political 
subdivision, or municipality in the continental United States, includ- 
ing irrigation, drainage and reclamation districts, such purchases to 
be made in accordance with rules and regulations prescribed by the 
Federal Reserve Board; 

(c) To purchase from member banks and to sell, with or without 1[ 98 
its indorsement, bills of exchange arising out of commercial trans- 
actions, as hereinbefore defined; 

(d) To establish, from time to time, subject to review and deter- •[ 99 
mination of the Federal Reserve Board, rates of discount to be 
charged by the Federal reserve bank for each class of paper, which 
shall be fixed with a view of accommodating commerce and business; 

(e) To establish accounts with other Federal reserve banks for^f 100 
exchange purposes and, with the consent of the Federal Reserve 
Board, to open and maintain banking accounts in foreign countries, 
appoint correspondents, and establish agencies in such countries 



THE FEDERAL RESERVE ACT. 171 

wheresoever it may deem best for the purpose of purchasing, selling, 
and collecting bills of exchange, and to buy and sell with or without 
its indorsement, through such correspondents or agencies, bills of 
exchange arising out of actual commercial transactions which have 
not more than ninety days to run and which bear the signature of 
two or more responsible parties. 

GOVERNMENT DEPOSITS. 

Sec. 15. The moneys held in the general fund of the Treasury,' 101 
except the five per centum fund for the redemption of outstanding 
national-bank notes and the funds provided in this Act for the re- 
demption of Federal reserve notes may, upon the direction of the 
Secretary of the Treasury, be deposited in Federal reserve banks, 
which banks, when required by the Secretary of the Treasury, shall 
act as fiscal agents of the United States; and the revenues of the 
Government or any part thereof may be deposited in such banks, and 
disbursements may be made by checks drawn against such deposits. 

Xo public funds of the Philippine Islands, or of the postal sav-' 102 
ings, or any government funds, shall be deposited in the continental 
United States in any bank not belonging to the system established 
by this Act: Provided, however, That nothing in this Act shall be 
construed to deny the right of the Secretary of the Treasury to use 
member banks as depositories. 

NOTE ISSUES. 

Sec. 16. Federal reserve notes, to be issued at the discre-" 103 
tion of the Federal Reserve Board for the purpose of making advances 
to Federal reserve banks through the Federal reserve agents as here- 
inafter set forth and for no other purpose, are hereby authorized. 
The said notes shall be obligations of the United States and shall be 
receivable by all national and member banks and Federal reserve 
banks and for all taxes, customs, and other public dues. They shall 
be redeemed in gold on demand at the Treasury Department of the 
United States, in the city of Washington, District of Columbia, or 
in gold or lawful money at any Federal reserve bank. 

Any Federal reserve bank may make application to the local ^f 104 
Federal reserve agent for such amount of the Federal reserve notes 
hereinbefore provided for as it may require. Such application shall 
be accompanied with a tender to the local Federal reserve agent of 
collateral in amount equal to the sum of the Federal reserve notes thus 
applied for and issued pursuant to such application. The collateral 



172 THE FEDERAL RESERVE ACT. 

security thus offered shall be notes and bills, accepted for re-discount 
under the provisions of section thirteen of this Act, and the Federal 
reserve agent shall each day notify the Federal Reserve Board of all 
issues and withdrawals of Federal reserve notes to and by the Federal 
reserve bank to which he is accredited. The said Federal Reserve 
Board may at any time call upon a Federal reserve bank for addi- 
tional security to protect the Federal reserve notes issued to it. 

Every Federal reserve bank shall maintain reserves in gold or • 108 
lawful money of not less than thirty-five per centum against its 
deposits and reserves in gold of not less than forty per centum 
against its Federal reserve notes in actual circulation, and not 
offset by gold or lawful money deposited with the Federal reserve 
agent. Notes so paid out shall bear upon their faces a distinctive 
letter and serial number, which shall be assigned by the Federal 
Reserve Board to each Federal reserve bank. Whenever Federal 
reserve notes issued through one Federal reserve bank shall be re- 
ceived by another Federal reserve bank they shall be promptly re- 
turned for credit or redemption to the Federal reserve bank through 
which they were originally issued. No Federal reserve bank shall 
pay out notes issued through another under penalty of a tax of ten 
per centum upon the face value of notes so paid out. Notes pre- 
sented for redemption at the Treasury of the United States shall be 
paid out of the redemption fund and returned to the Federal reserve 
banks through which they were originally issued, and thereupon such 
Federal reserve bank shall, upon demand of the Secretary of the 
Treasury, reimburse such redemption fund in lawful money or, if 
such Federal reserve notes have been redeemed by the Treasurer 
in gold or gold certificates, then such funds shall be reimbursed to 
the extent deemed necessary by the Secretary of the Treasury in gold 
or gold certificates, and such Federal reserve bank shall, so long as 
any of its Federal reserve notes remain outstanding, maintain with 
the Treasurer in gold an amount sufficient in the judgment of the 
Secretary to provide for all redemptions to be made by the Treasurer. 
Federal reserve notes received by the Treasury, otherwise than for 
redemption, may be exchanged for gold out of the redemption fund 
hereinafter provided and returned to the reserve bank through which 
they were originally issued, or they may be returned to such bank 
for the credit of the United States. Federal reserve notes unfit for 
circulation shall be returned by the Federal reserve agents to the 
Comptroller of the Currency for cancellation and destruction. 

The Federal Reserve Board shall require each Federal re- *[ 106 
serve bank to maintain on deposit in the Treasury of the United 
States a sum in gold sufficient in the judgment of the Secretary of the 



THE FEDERAL RESERVE ACT. 173 

Treasury for the redemption of the Federal reserve notes issued to 
such bank, hut in no event less than five per centum; but such de- 
posit of gold shall be counted and included as part of the forty per 
centum reserve hereinbefore required. The board shall have the 
right, acting through the Federal reserve agent, to grant in whole 
or in part or to reject entirely the application of any Federal reserve 
bank for Federal reserve notes; but to the extent that such appli- 
cation may be granted the Federal Reserve Board shall, through 
its local Federal reserve agent, supply Federal reserve notes to the 
bank so applying, and such bank shall be charged with the amount 
of such notes and shall pay such rate of interest on said amount as 
may be established by the Federal Reserve Board, and the amount of 
such Federal reserve notes so issued to any such bank shall, upon 
delivery, together with such notes of such Federal reserve bank as 
may be issued under section eighteen of this Act upon security of 
United States two per centum Government bonds, become a first 
and paramount lien on all the assets of such bank. 

Any Federal reserve bank may at any time reduce its liability* 107 
for outstanding Federal reserve notes by depositing, with the Federal 
reserve agent, its Federal reserve notes, gold, gold certificates, or 
lawful money of the United States. Federal reserve notes so depos- 
ited shall not be reissued, except upon compliance with the conditions 
of an original issue. 

The Federal reserve agent shall hold such gold, gold certifi-* 108 
cates, or lawful money available exclusively for exchange for the out- 
standing Federal reserve notes when offered by the reserve bank of 
which he is a director. Upon the request of the Secretary of the 
Treasury the Federal Reserve Board shall require the Federal re- 
serve agent to transmit so much of said gold to the Treasury of the 
United States as may be required for the exclusive purpose of the 
redemption of such notes. 

Any Federal reserve bank may at its discretion withdraw •? 109 
collateral deposited with the local Federal reserve agent for the pro- 
tection of its Federal reserve notes deposited with it and shall at the 
same time substitute therefor other like collateral of equal amount 
with the approval of the Federal reserve agent under regulations to 
be prescribed by the Federal Reserve Board. 

In order to furnish suitable notes for circulation as Federal *[ 110 
reserve notes, the Comptroller of the Currency shall, under the direc- 
tion of the Secretary of the Treasury, cause plates and dies to be en- 
graved in the best manner to guard against counterfeits and fraudulent 
alterations, and shall have printed therefrom and numbered such 
quantities of such notes of the denominations of $5, $10, $20, $50, 



174 THE FEDERAL RESERVE ACT. 

$100, as may be required to supply the Federal reserve banks. 
Such notes shall be in form and tenor as directed by the Secretary of 
the Treasury under the provisions of this Act and shall bear the 
distinctive numbers of the several Federal reserve banks through 
which they are issued. 

When such notes have been prepared, they shall be deposited " 111 
in the Treasury, or in the sub-treasury or mint of the United States 
nearest the place of business of each Federal reserve bank and shall 
be held for the use of such bank subject to the order of the Comp- 
troller of the Currency for their delivery, as provided by this Act. 

The plates and dies to be procured by the Comptroller' 112 
of the Currency for the printing of such circulating notes shall remain 
under his control and direction, and the expenses necessarily incurred 
in executing the laws relating to the procuring of such notes, and all 
other expenses incidental to their issue and retirement, shall be paid 
by the Federal reserve banks, and the Federal Reserve Board shall 
include in its estimate of expenses levied against the Federal reserve 
banks a sufficient amount to cover the expenses herein provided for. 

The examination of plates, dies, bed pieces, and so forth,' 113 
and regulations relating to such examination of plates, dies, and so 
forth, of national bank notes provided for in section fifty-one hundred 
and seventy-four Revised Statutes, is hereby extended to include 
notes herein provided for. 

Any appropriation heretofore made out of the general funds" 114 
of the Treasury for engraving plates and dies, the purchase of distinc- 
tive paper, or to cover any other expense in connection with the 
printing of national bank notes or notes provided for by the Act of 
May thirtieth, nineteen hundred and eight, and any distinctive paper 
that may be on hand at the time of the passage of this Act may be 
used in the discretion of the Secretary for the purposes of this Act, 
and should the appropriations heretofore made be insufficient to 
meet the requirements of this Act in addition to circulating notes 
provided for by existing law, the Secretary is hereby authorized to 
use so much of any funds in the Treasury not otherwise appropriated 
for the purpose of furnishing the notes aforesaid: Provided, however, 
That nothing in this section contained shall be construed as exempt- 
ing national banks or Federal reserve banks from their liability to 
reimburse the United States for any expenses incurred in printing 
and issuing circulating notes. 

Every Federal reserve bank shall receive on deposit at par" 115 
from member banks or from Federal reserve banks cheeks and drafts 
drawn upon any of its depositors, and when remitted by a Federal 
reserve bank, checks and drafts drawn by any depositor in any other 



THE FEDERAL RESERVE ACT. 175 

Federal reserve bank or member bank upon funds to the credit of said 
depositor in said reserve bank or member bank. Nothing herein 
contained shall be construed as prohibiting a member bank from 
charging its actual expense incurred in collecting and remitting funds, 
or for exchange sold to its patrons. The Federal Reserve Board 
shall, by rule, fix the charges to be collected by the member banks 
from its patrons whose checks are cleared through the Federal re- 
serve bank and the charge which may be imposed for the service of 
clearing or collection rendered by the Federal reserve bank. 

The Federal Reserve Board shall make and promulgate •( lift 
from time to time regulations governing the transfer of funds and 
charges therefor among Federal reserve banks and their branches, 
and may at its discretion exercise the functions of a clearing house for 
such Federal reserve banks, or may designate a Federal reserve bank 
to exercise such functions, and may also require each such bank to 
exercise the functions of a clearing house for its member banks. 

Sec. 17. So much of the provisions of section fifty-one hun-^117" 
dred and fifty-nine of the Revised Statutes of the United States, and 
section four of the Act of June twentieth, eighteen hundred and 
seventy-four, and section eight of the Act of July twelfth, eighteen 
hundred and eighty-two, and of any other provisions of existing 
statutes as require that before any national banking associations 
shall be authorized to commence banking business it shall transfer 
and deliver to the Treasurer of the United States a stated amount of 
United States registered bonds is hereby repealed. 

REFUNDING BONDS. 

Sec. 18. After two years from the passage of this Act, and^j 118- 
at any time during a period of twenty years thereafter, any member 
bank desiring to retire the whole or any part of its circulating notes, 
may file with the Treasurer of the United States an application to sell 
for its account, at par and accrued interest, United States bonds 
securing circulation to be retired. 

The Treasurer shall, at the end of each quarterly period,* 119 
furnish the Federal Reserve Board with a list of such applications, 
and the Federal Reserve Board may, in its discretion, require the 
Federal reserve banks to purchase such bonds from the banks whose 
applications have been filed with the Treasurer at least ten days be- 
fore the end of any quarterly period at which the Federal Reserve 
Board may direct the purchase to be made: Provided, That Federal 
reserve banks shall not be permitted to purchase an amount to exceed 
$25,000,000 of such bonds in any one year, and which amount shall 



176 THE FEDERAL RESERVE ACT. 

include bonds acquired under section four of this Act by the Federal 
reserve bank. 

Provided further, That the Federal Reserve Board shalr allot H 120 
to each Federal reserve bank such proportion of such bonds as the 
capital and surplus of such bank shall bear to the aggregate capital 
and surplus of all the Federal reserve banks. 

Upon notice from the Treasurer of the amount of bonds so ^ 121 
sold for its account, each member bank shall duly assign and transfer, 
in writing, such bonds to the Federal reserve bank purchasing the 
same, and such Federal reserve bank shall, thereupon, deposit lawful 
money with the Treasurer of the United States for the purchase price 
of such bonds, and the Treasurer shall pay to the member bank selling 
such bonds any balance due after deducting a sufficient sum to 
redeem its outstanding notes secured by such bonds, which notes 
shall be canceled and permanently retired when redeemed. 

The Federal reserve banks purchasing such bonds shall ^[122 
be permitted to take out an amount of circulating notes equal to the 
par value of such bonds. 

Upon the deposit with the Treasurer of the United States of * 123 
bonds so purchased, or any bonds with the circulating privilege ac- 
quired under section four of this Act, any Federal reserve bank mak- 
ing such deposit in the manner provided by existing law shall be 
entitled to receive from the Comptroller of the Currency circulating 
notes in blank, registered and countersigned as provided by law, equal 
in amount to the par value of the bonds so deposited. Such notes 
shall be the obligations of the Federal reserve bank procuring the 
same, and shall be in form prescribed by the Secretary of the Treas- 
ury, and to the same tenor and effect as national bank notes now 
provided by law. They shall be issued and redeemed under the 
same terms and conditions as national bank notes except that they 
shall not be limited to the amount of the capital stock of the Federal 
reserve bank issuing them. 

Upon application of any Federal reserve bank, approved by1[124 
the Federal Reserve Board, the Secretary of the Treasury may issue, 
in exchange for United States two per centum gold bonds bearing the 
circulation privilege, but against which no circulation is outstanding, 
one-year gold notes of the United States without the circulation 
privilege, to an amount not to exceed one-half of the two per centum 
bonds so tendered for exchange, and thirty-year three per centum 
gold bonds without the circulation privilege for the remainder of the 
two per centum bonds so tendered: Provided, That at the time of 
such exchange the Federal reserve bank obtaining such one-year gold 
notes shall enter into an obligation with the Secretary of the Treas- 



THE FEDERAL RESERVE ACT. 177 

ury binding itself to purchase from the United States for gold at the 
maturity of such one-year notes, an amount equal to those delivered 
in exchange for such bonds, if so requested by the Secretary, and at 
each maturity of one-year notes so purchased by such Federal reserve 
bank, to purchase from the United States such an amonut of one-year 
notes as the Secretary may tender to such bank, not to exceed the 
amount issued to such bank in the first instance, in exchange for the 
two per centum United States gold bonds; said obligation to pur- 
chase at maturity such notes shall continue in force for a period not 
to exceed thirty years. 

For the purpose of making the exchange herein provided for, ^[125 
the Secretary of the Treasury is authorized to issue at par Treasury 
notes in coupon or registered form as he may prescribe, in denomina- 
tions of one hundred dollars, or any multiple thereof, bearing interest 
at the rate of three per centum per annum, payable quarterly, such 
Treasury notes to be payable not more than one year from the date 
of their issue in gold coin of the present standard value, and to be 
exempt as to principal and interest from the payment of all taxes and 
duties of the United States except as provided by this Act, as well as 
from taxes in any form by or under State, municipal, or local au- 
thorities. And for the same purpose, the Secretary is authorized and 
empowered to issue United States gold bonds at par, bearing three 
per centum interest payable thirty years from date of issue, such 
bonds to be of the same general tenor and effect and to be issued under 
the same general terms and conditions as the United States three per 
centum bonds without the circulation privilege now issued and out- 
standing. 

Upon application of any Federal reserve bank, approved by1[126 
the Federal Reserve Board, the Secretary may issue at par such three 
per centum bonds in exchange for the one-year gold notes herein 
provided for. 

BANK RESERVES. 

*Sec. 19. Demand deposits within the meaning of this Act ^[ 127 
shall comprise all deposits payable within thirty days, and time de- 
posits shall comprise all deposits payable after thirty days, and all 
savings accounts and certificates of deposit which are subject to not 
less than thirty days' notice before payment. 

When the Secretary of the Treasury shall have officially an- *[ 128 
nounced, in such manner as he may elect, the establishment of a 



* As amended August 15, 1914. Old matter repealed in [ ]. New matter 
in italics. 



178 THE FEDERAL RESERVE ACT. 

Federal reserve bank in any district, every subscribing member 
bank shall establish and maintain reserves as follows: 

(a) A bank not in a reserve or central reserve city as now or here-^f 129 
after defined shall hold and maintain reserves equal to twelve per 
centum of the aggregate amount of its demand deposits and five per 
centum of its time deposits, as follows: 

In its vaults for a period of thirty-six months after said date If 130 
five-twelfths thereof and permanently thereafter four-twelfths. 

In the Federal reserve bank of its district, for a period of twelve^ 131 
months after said date, two-twelfths, and for each succeeding six 
months an additional one-twelfth, until five-twelfths have been so 
deposited, which shall be the amount permanently required. 

For a period of thirty-six months after said date the balance of1[132 
the reserves may be held in its own vaults, or in the Federal reserve 
bank, or in national banks in reserve or central reserve cities as now 
defined by law. 

After said thirty-six months' period said reserves, other than* L33 
those hereinbefore required to be held in the vaults of the member 
bank and in the Federal reserve bank, shall be held in the vaults of 
the member bank or in the Federal reserve bank, or in both, at the 
option of the member bank. 

(b) A bank in a reserve city, as now or hereafter defined, shall^j 134 
hold and maintain reserves equal to fifteen per centum of the aggre- 
gate amount of its demand deposits and five per centum of its time 
deposits, as follows: 

In its vaults for a period of thirty-six months after said date, six-*|[ 135 
fifteenths thereof, and permanently thereafter five-fifteenths. 

In the Federal reserve bank of its district for a period of twelve ^f 136 
months after the date aforesaid, at least three-fifteenths, and for 
each succeeding six months an additional one-fifteenth, until six- 
fifteenths have been so deposited, which shall be the amount perma- 
nently required. 

For a period of thirty-six months after said date the balance of^[137 
the reserves may be held in its own vaults, or in the Federal reserve 
bank or in national banks in [reserve or] central reserve cities, as 
now defined by law. 

After said thirty-six months' period all of said reserves, except^ 138 
those hereinbefore required to be held permanently in the vaults of 
the member bank and in the Federal reserve bank, shall be held in 
its vaults or in the Federal reserve bank or in both, at th? option of 
the member bank. 

(c) A bank in a central reserve city, as now or hereafter de-^139 
fined, shall hold and maintain a reserve equal to eighteen per centum 



THE FEDERAL RESERVE ACT. 179 

of the aggregate amount of its demand deposits and five per centum 
of its time deposits, as follows: 

In its vaults, six-eighteenths thereof. 1 140 

In the Federal reserve bank, seven-eighteenths. 

The balance of said reserves shall be held in its own vaults or in 
the Federal reserve bank, at its option. 

Any Federal reserve bank may receive from the member 1[ 141 
banks as reserves not exceeding one-half of each instalment, eligible 
paper as described in section [fourteen] thirteen properly indorsed 
and acceptable to the said reserve bank. 

If a State bank or trust company is required or permitted* 142 
by the law of its State to keep its reserves either in its own vaults or 
with another State bank or trust company or with a national bank, 
such reserve deposits so kept in such State bank, trust company, or 
national bank shall be construed within the meaning of this section 
as if they were reserve deposits in a national bank in a reserve or 
central reserve city for a period of three years after the Secretary of 
the Treasury shall have officially announced the establishment of a 
Federal reserve bank in the district in which such State bank or trust 
company is situated. Except as thus provided, no member bank 
shall keep on deposit with any non-member bank a sum in excess of 
ten per centum of its own paid-up capital and surplus. No member 
bank shall act as the medium or agent of a non-member bank in 
applying for or receiving discounts from a Federal reserve bank 
under the provisions of this Act except by permission of the Federal 
Reserve Board. 

The reserve carried by a member bank with a Federal* 143 
reserve bank may, under the regulations and subject to such penalties 
as may be prescribed by the Federal Reserve Board, be checked 
against and withdrawn by such member bank for the purpose of meet- 
ing existing liabilities: Provided, however, That no bank shall at any 
time make new loans or shall pay any dividends unless and until the 
total reserve required by law is fully restored. 

In estimating the reserves required by this Act, the netl|144 
balance of amounts due to and from other banks shall be taken as the 
basis for ascertaining the bank deposits against which reserves shall 
be determined. Balances in reserve banks due to member banks 
shall, to the extent herein provided, be counted as reserves. 

National banks located in Alaska or outside the continental*' 145 
United States may remain non-member banks, and shall in that 
event maintain reserves and comply with all the conditions now pro- 
vided by law regulating them; or said banks, except in the Philip- 
pine Islands, may, with the consent of the Reserve Board, become 



ISO THE FEDERAL RESERVE ACT. 

member banks of any one of the reserve districts, and shall, in that 
event, take stock, maintain reserves, and be subject to all the other 
provisions of this Act. 

Sec. 20. So much of sections two and three of the Act of June*, 1 §8 
twentieth, eighteen hundred and seventy-four, entitled "An Act 
fixing the amount of United States notes, providing for a redistribu- 
tion of the national bank currency, and for other purposes," as pro- 
vides that the fund deposited by any national banking association 
with the Treasurer of the United States for the redemption of its 
notes shall be counted as a part of its lawful reserve as provided in 
the Act aforesaid, is hereby repealed. And from and after the pas- 
sage of this Act such fund of five per centum shall in no case be 
counted by any national banking association as a part of its lawful 
reserve . 

BANK EXAMINATIONS. 

Sec. 21. Section fifty-two hundred and forty, United States' 147 
Revised Statutes, is amended to read as follows: 

The Comptroller of the Currency, with the approval of the* 14S 
Secretary of the Treasury, shall appoint examiners who shall examine 
every member bank at least twice in each calendar year and oftener 
if considered necessary: Provided, however, That the Federal Re- 
serve Board may authorize examination by the State authorities to 
be accepted in the case of State banks and trust companies and may 
at any time direct the holding of a special examination of State banks 
or trust companies that are stockholders in any Federal reserve 
bank. The examiner making the examination of any national bank , 
or of any other member bank, shall have power to make a thorough 
examination of all the affairs of the bank and in doing so he shall 
have power to administer oaths and to examine any of the officers 
and agents thereof under oath and shall make a full and detailed 
report of the condition of said bank to the Comptroller of the Cur- 
rency. 

The Federal Reserve Board, upon the recommendation of* 14!) 
the Comptroller of the Currency, shall fix the salaries of all bank ex- 
aminers and make report thereof to Congress. The expense of the 
examinations herein provided for shall be assessed by the Comptroller 
of the Currency upon the banks examined in proportion to assets or 
resources held by the banks upon the dates of examination of the 
various banks. 

In addition to the examinations made and conducted by the* 160 
Comptroller of the Currency, every Federal reserve bank may, with 
the approavl of the Federal reserve agent or the Federal Reserve 



THE FEDERAL RESERVE ACT. 181 

Board, provide for special examination of member banks within its 
district. The expense of such examinations shall be borne by the 
bank examined. Such examinations shall be so conducted as to in- 
form the Federal reserve bank of the condition of its member banks 
and of the lines of credit which are being extended by them. Every 
Federal reserve bank shall at all times furnish to the Federal Reserve 
Board such information as may be demanded concerning the condi- 
tion of any member bank within the district of the said Federal re- 
serve bank. 

No bank shall be subject to any visitatorial powers other^I 151 
than such as are authorized by law, or vested in the courts of justice 
or such as shall be or shall have been exercised or directed by Con- 
gress, or by either House thereof or by any committee of Congress 
or of either House duly authorized. 

The Federal Reserve Board shall, at least once each year ,1[ 152 
order an examination of each Federal reserve bank, and upon joint 
application of ten member banks the Federal Reserve Board shall 
order a special examination and report of the condition of any Federal 
reserve bank. 

Sec. 22. No member bank or any officer, director, or em-^fl53 
ployee thereof shall hereafter make any loan or grant any gratuity 
to any bank examiner. Any bank officer, director, or employee 
violating this provision shall be deemed guilty of a misdemeanor 
and shall be imprisoned not exceeding one year or fined not more than 
S5000, or both; and may be fined a further sum equal to the money 
so loaned or gratuity given. Any examiner accepting a loan or 
gratuity from any bank examined by him or from an officer, director, 
or employee thereof shall be deemed guilty of a misdemeanor and 
shall be imprisoned not exceeding one year or fined not more than 
S5000, or both; and may be fined a further sum equal to the money 
so loaned or gratuity given; and shall forever thereafter be disquali- 
fied from holding office as a national bank examiner. No national 
bank examiner shall perform any other service for compensation 
while holding such office for any bank or officer, director, or employee 
thereof. 

Other than the usual salary or director's fee paid to any^fl54 
officer, director, or employee of a member bank and other than a 
reasonable fee paid by said bank to such officer, director, or employee 
for services rendered to such bank, no officer, director, employee, 
or attorney of a member bank shall be a beneficiary of or receive, 
directly or indirectly, any fee, commission, gift, or other considera- 
tion for or in connection with any transaction or business of the bank. 
No examiner, public or private, shall disclose the names of borrowers 



182 THE FEDERAL RESERVE ACT. 

or the collateral for loans of a member bank to other than the proper 
officers of such bank without first having obtained the express per- 
mission in writing from the Comptroller of the Currency, or from tin- 
board of directors of such bank, except when ordered to do so by a 
court of competent jurisdiction, or by direction of the Congress of 
the United States, or of either House thereof, or an\ committee of 
Congress or of either House duly authorized. Any person violating 
any provision of this section shall be punished by a fine of not ex- 
ceeding $5000 or by imprisonment not exceeding one year, or both. 

Except as provided in existing laws, this provision shall not ^[155 
take effect until sixty days after the passage of this Act. 

Sec. 23. The stockholders of every national banking associa- ^[ 156 
tion shall be held individually responsible for all contracts, debts, and 
engagements of such association, each to the amount of his stock 
therein, at the par value thereof in addition to the amount invested 
in such stock. The stockholders in any national banking association 
who shall have transferred their shares or registered the transfer 
thereof within sixty days next before the date of the failure of such 
association to meet its obligations, or with knowledge of such im- 
pending failure, shall be liable to the same extent as if they had made 
no such transfer, to the extent that the subsequent transferee fails to 
meet such liability; but this provision shall not be construed to 
affect in any way any recourse which such shareholders might other- 
wise have against those in whose names such shares are registered at 
the time of such failure. 

LOANS ON FARM LANDS. 

Sec. 24. Any national banking association not situated in a ^[157 
central reserve city may make loans secured by improved and unen- 
cumbered farm land, situated within its Federal reserve district, but 
no such loan shall be made for a longer time than five years, nor 
for an amount exceeding fifty per centum of the actual value of the 
property offered as security. Any such bank may make such loans 
in an aggregate sum equal to twenty-five per centum of its capital 
and surplus or to one-third of its time deposits and such banks may 
continue hereafter as heretofore to receive time'deposits and to pay 
interest on the same. 

The Federal Reserve Board shall have power from time to time* 158 
to add to the list of cities in which national banks shall not be per- 
mitted to make loans secured upon real estate in the manner described 
in this section. 



THE FEDERAL RESERVE ACT. 183 



FOREIGN BRANCHES. 

Sec. 25. Any national banking association possessing a capital^ 159 
and surplus of $1,000,000 or more may file application with the 
Federal Reserve Board, upon such conditions and under such regula- 
tions as may be prescribed by the said board, for the purpose of 
securing authority to establish branches in foreign countries or de- 
pendencies of the United States for the furtherance of the foreign com- 
merce of the United States, and to act, if required to do so, as fiscal 
agents of the United States. Such application shall specify, in addi- 
tion to the name and capital of the banking association filing it, the 
place or places where the banking operations proposed are to be car- 
ried on, and the amount of capital set aside for the conduct of its 
foreign business. The Federal Reserve Board shall have power to 
approve or to reject such application if, in its judgment, the amount 
of capital proposed to be set aside for the conduct of foreign business 
is inadequate, or if for other reasons the granting of such application 
is deemed inexpedient. 

Every national banking association which shall receive authority If 160 
to establish foreign branches shall be required at all times to furnish 
information concerning the condition of such branches to the Comp- 
troller of the Currency upon demand, and the Federal Reserve Board 
may order special examinations of the said foreign branches at such 
time or times as it may deem best. Every such national banking 
association shall conduct the accounts of each foreign branch in- 
dependently of the accounts of other foreign branches established 
by it and of its home office, and shall at the end of each fiscal period 
transfer to its general ledger the profit or loss accruing at each branch 
as a separate item. 

Sec. 26. All provisions of law inconsistent with or superseded^ 161 
by any of the provisions of this Act are to that extent and to that 
extent only hereby repealed: Provided, Nothing in this Act con- 
tained shall be construed to repeal the parity provision or provisions 
contained in an Act approved March fourteenth, nineteen hundred, 
entitled "An Act to define and fix the standard of value, to maintain 
the parity of all forms of money issued or coined by the United States, 
to refund the public debt, and for other purposes," and the Secretary 
of the Treasury may for the purpose of maintaining such parity and 
to strengthen the gold reserve, borrow gold on the security of United 
States bonds authorized by section two of the Act last referred to 
or for one-year gold notes bearing interest at a rate of not to exceed 
three per centum per annum, or sell the same if necessary to obtain 



184 THE FEDERAL RESERVE ACT. 

gold. When the funds of the Treasury on hand justify, he nwiy 
purchase and retire such outstanding bonds and notes. 

*Sec. 27. The provisions of the Act of May thirtieth, nine- 11 162 
teen hundred and eight authorizing national currency associations, 
the issue of additional national bank circulation, and creating a 
National Monetary Commission, which expires by limitation under 
the terms of such Act on the thirtieth day of June, nineteen hundred 
and fourteen, are hereby extended to June thirtieth, nineteen hundred 
and fifteen, and sections fifty-one hundred and fifty-three, fifty-one 
hundred and seventy-two, fifty-one hundred and ninety-one, and 
fifty-two hundred and fourteen of the Revised Statutes of the United 
States, which were amended by the Act of May thirtieth, nineteen 
hundred and eight, are hereby re-enacted to read as such sections 
read prior to May thirtieth, nineteen hundred and eight, subject to 
such amendments or modifications as are prescribed in this Act: 
Provided, however, That section nine of the Act first referred to in 
this section is hereby amended so as to change the tax rates fixed in 
said Act by making the portion applicable thereto read as follows: 

National banking associations having circulating notesll 1 63 
secured otherwise than by bonds of the United States, shall pay for 
the first three months a tax at the rate of three per centum per an- 
num upon the average amount of such of their notes in circulation 
as are based upon the deposit of such securities, and afterwards an 
additional tax rate of one-half of one per centum per annum for each 
month until a tax of six per centum per annum is reached, and there- 
after such tax of six per centum per annum upon the average amount 
of such notes: Provided further, That whenever in his judgment he 
may deem it desirable, the Secretary of the Treasury shall have power 
to suspend the limitations imposed by section one and section three 
of the Act referred to in this section, which prescribe that such additional 
circulation secured otherwise than by bonds of the United Slates shall 
be issued only to national banks having circulating notes outstanding 
secured by the deposit of bonds of the United Stales to an amount not 
less than forty per centum of the capital slock of such banks and to 
suspend also the conditions and limitations of section five of said Act 
except that no bank shall be permitted to issue circulating notes in excess 
of one hundred and twenty-five per centum of Us unimpaired capital 
and surplus. He shall require each bank and currency association 
to maintain on deposit in the Treasury of the United States a sum in 
gold sufficient in his judgment for the redemption of such notes, but in 
no event less than five per centum. He may permit national banks, 



* As amended August 4, 1914. New matter in italics. 



THE FEDERAL RESERVE ACT. 185 

during the period for which such provisions are suspended, to issue 
additional circulation under the terms and conditions of the Act referred 
to as herein amended: Provided further, That the Secretary of the 
Treasury in his discretion, is further authorized to extend the benefits 
of this Act to all qualified State banks and trust companies, which have 
joined the Federal reserve system or which may contract to join within 
if teen days after the passage of this Act. 

Sec. 28. Section fifty-one hundred and forty-three of the Re-' 164 
vised Statutes is hereby amended and re-enacted to read as follows: 
Any association formed under this title may, by the vote of share- 
holders owning two-thirds of its capital stock, reduce its capital to 
any sum not below the amount required by this title to authorize 
the formation of associations; but no such reduction shall be allow- 
able which will reduce the capital of the association below the amount 
required for its outstanding circulation, nor shall any reduction be 
made until the amount of the proposed reduction has been reported 
to the Comptroller of the Currency and such reduction has been ap- 
proved by the said Comptroller of the Currency and by the Federal 
Reserve Board, or by the organization committee pending the organi- 
zation of the Federal Reserve Board. 

Sec. 29. If any clause, sentence, paragraph, or part of this *J" 165 
Act shall for any reason be adjudged by any court of competent juris- 
diction to be invalid, such judgment shall not affect, impair, or 
invalidate the remainder of this Act, but shall be confined in its 
operation to the clause, sentence, paragraph, or part thereof directly 
involved in the controversy in which such judgment shall have been 
rendered . 

Sec. 30. The right to amend, alter, or repeal this Act is hereby*! 166 
expressly reserved . 

Approved , December 23, 1913. 



INDEX TO STATUTE. 



Section 
Acceptances 

DEALINGS IN BY FED. ReS. BANKS . 14 

DISCOUNT OF BY FED. ReS. BANKS . . 13 

member banks authorized to make . . 13 

Acceptance Of Act 

by national banks in 60 days . . 2 

penalties 

on reserve agents .... 2 

on all banks ..... 2 

Agent 

Federal Reserve (see Federal Reserve 
Agent) foreign of Fed. Res. banks 

Agricultural Paper 

DISCOUNT BY FED. ReS. BANKS 

Aldrich Act 

continued to june 30, 1915 

Amendment 

right reserved .... 

Bank Examinations .... 

expenses of ..... 

of Federal Reserve banks 
of member banks 

by Comptroller of Currency 
by Fed. Res. banks . . . 

of state banks . . . 

Bank Examiners 
appointment 
disclosures by 
penalties on 
restrictions on 
salaries 

Banks (National) See National Banks 

Banks (Federal Reserve) See Federal Reserve Banks 

Banks (Member) See Member Banks 

Banks (Non-Member) See Non-Member Banks 



14 



13 



27 



30 



Para- 
graph 

94 
89 
91 



100 



ss 



162 



166 



21 


147-152 


21 


149 


21 


152 


21 


148 


21 


150 


21 


148 


21 


148 


22 


154 


22 


153 


22 


153 


21 


149 



INDEX TO STATUTE. 



187 



Bills 



DEALINGS IN 
DISCOUNT OF 
RE-DISCOUNT OF 



Section 

14 
13 
13 



Para- 
graph 



94, 100 

88,90 

93 



Board (Federal Reserve) See Federal Reserve Board 



Bonds 

municipal, Fed. Res. banks may buy and 

SELL . ...... 

REFUNDING, U. S. 3s TO ISSUE FOR U. S. 2s . 

United States 

deposit of by new banks not required 
Fed. Res. banks may buy and sell 
note issues of fed. res. banks se- 
CURED BY . . . 

security for nat. bank notes, sale 
of, to Fed. Res. banks . 



14 


97 


18 


124-126 


17 


117 


14 


97 


4 


29 


18 


122,123 



18 118-121 



Branch Banks 

establishment by fed . res. banks 
foreign of national banks 



3 
25 



17 

159 



Cable Transfers 
dealings in 



14 



94 



Capital Stock 

of Federal Reserve banks 
cancellation of 
dividends on 
increase of 
insolvent banks owning . 

MINIMUM $4,000,000 . 

par value $100. 
public holdings restricted 
reduction of 
subscription to 

by national banks 

by other banks 

by public 

by United States . 
tax exempt 
transfers 

prohibited by member banks 

REGULATED BY FED. ReS. BOARD 
OF NATIONAL BANKS 

REDUCTION OF ... . 



5 


51 


7 


53 


5 


51 


6 


52 


2 


16 


5 


51 


2 


12 


5 


51 


2 


6 


2 


6 


2 


11. 12 


2 


13 


7 


• 55 


5 


51 


2 


15 



28 



164 



188 



INDEX TO STATUTE. 



Central Reserve Cities 
not changed by act 
Federal Reserve Board may change 

Chairman 

of Federal Reserve Banks 
of Federal Reserve Board 



Section 

2 
11 



4 
10 



Circulation (See Note Issues) 

Cities (Federal Reserve) See Federal Reserve Cities 

Clearing House 

Federal Reserve banks as ... 16 



Federal Reserve Board may act as 

Collection Charges 

by Federal Reserve banks 

Commercial Paper 

DISCOUNT BY FeR. ReS. BANK8 

reserve for member banks, use as 

Commission 

to bank directors prohibited 

Comptroller Of Currency 

capital stock reductions by national 
banks to approve .... 
duties of 

bank examinations as to 
Federal Reserve banks as to 
beginning business to authorize 
organization ctfs to file 
stock subn blanks to supply 
Federal Reserve notes as to 

GENERAL ...... 

member of 

Federal Reserve Board 
Organization Committee 

Constitutionality . . . . . 

Currency Associations 

provision for, continued 

Definitions ...... 

Deposits 

in Federal Reserve banks 

by whom ..... 

checks what at par 



16 



16 



13 
19 



22 



Para- 
graph 

16 

77 



37,47 

67 



29 



116 
116 



115 



88 
141 



154 



28 


164 


21 


148 


4 


30 


4 


19-21 


4 


18 


16 


105, 




110-112 


10 


71 


10 


64 


2 


4 



165 



27 


162 


1 


2,3 


13 


87 


16 


115 


16 


115 



INDEX TO STATUTE. IS9 



D eposits — Continued. 
United States 



Para- 
Section graph 

f 13 87 

(15 101,102 



4 


48 


4 


34-37 


4 


31-33 


4 


38-40 


11 


78 


4 


41-46 


4 


37,47 


4 


34,50 


4 


50 



IN MEMBER BANKS 

OF BANKS-RESERVE AGAINST HOW ASCER- 
TAINED ....... 19 144 

demand defined . . . . .19 127 

time defined . . . . .19 127 

Deputy Federal Reserve Agents ... 4 47 

Directors 

of branch banks of Fed. Res. banks how 

selected ....... 3 17 

of Federal Reserve banks 

compensation of .... 

composition of board 

duties of ..... 

ineligible who are 

REMOVAL OF BY FED. ReS. BOARD 

selected how 
Classes a and b 
Class c ..... 

term of office ..... 

vacancies ...... 

of member banks 

commissions to prohibited . . .22 154 

of national banks 

liability for violations of act 2 9 

Discount Rate 

Federal Reserve banks 

establishment of ... . 
re-discount for other fed. res. bks 
reserves deficient when 

Discounts 

by Federal Reserve banks . . . .13 88-90 

Dissolution 

of Federal Reserve banks 

of National banks 

for failure to comply with act 
voluntary ..... 

Districts (Federal Reserve) See Federal Reserve Districts. 

Dividends 

of Federal Reserve banks ... 7 53 



14 


99 


11 


74 


11 


75 



7 


54 


10 


80 


2 


9 


5 


51 



190 



INDEX TO STATUTE. 



Emergency Currency 

limitations on, modified 
provision for, continued 
redemption fund for 
State banks may issue 
taxation .... 

Examinations 

OF BANKS 

Farm Loans ... 

Federal Advisory Council 
Meetings 
Membership 
Powers 

Federal Reserve Agents 
appointment of 
note issues through 

redemption of notes by 
regulations for 

Federal Reserve Banks 
acceptances 

may deal in .... 

may discount . 

accounts with other fed. res. banks 
begin business when 

BILLS 

MAY BUY ..... 

MAY DEAL IN .... 

MAY DISCOUNT . . ... 

BONDS 

municipal may buy and sell 
United States 

may buy and sell 

may exchange for refunding bonds 

and notes 
must purchase when 
branches, how established 
cable transfers, may deal in 
capital (see Capital Stock) 
chairman of ... 

collection charges by 
commercial paper as reserve for mem- 
ber banks in 

deposits in, by whom 

deputy chairman of 











Para- 


Section 




graph 


. 27 




16a 






. 27 




162 






. 27 




16» 






. 27 




iea 






. 27 




16a 


. 21 


14< 


-152 


. 24 




157 


. 12 




85 


. 12 




85 


. 12 




86 


. 4 




47 


. 16 




104, 




107 


-109 


. 16 


107 


, 108 






. 11 




81 



14 


94 


13 


89 


14 


100 


4 


30 


14 


98 


14 


94, 100 


13 


88,90 



14 



14 



97 



97 



18 


124-126 


18 


119, 120 


3 


17 


14 


94 


4 


37,47 


16 


115 


19 


141 


13 


87 


15 


101 


16 


115 


4 


47' 



INDEX TO STATUTE. 



191 



Section 



Federal Reserve Banks — Continued. 

DIRECTORS OF (SEE DIRECTORS) 
DISCOUNT BY 

OF ACCEPTANCES 

OF DRAFTS AND BILLS 
DISCOUNT RATE 

ESTABLISHMENT OF . 

RE-DISCOUNT FOR OTHER FED . RES. BKS 

RESERVE DEFICIENT WHEN 
DIVIDENDS .... 

EMPLOYEES OF ... 

FOREIGN AGENCIES OF 
GOLD MAY DEAL IN 

GOVERNMENT DEPOSITS IN 

LIQUIDATION OF 

NET EARNINGS OF 

NOTE ISSUES OF (SEE NOTE ISSUES) 

OPEN MARKET OPERATIONS BY 

ORGANIZATION 

METHOD OF ... 

SUPERVISION OF BY ORGANIZATION COM. 
POWERS 

CORPORATE ...... 

GENERAL ...... 

RE-DISCOUNT 

OF BILLS ...... 

FOR OTHER Fed. ReS. BANKS 

reserve of member banks to hold 
surplus of ..... 

suspension of ..... 

taxation of . 

transfer of funds by ... 

United States bonds (see Bonds above) 

Federal Reserve Board 

agents, Federal Reserve 

to appoint ..... 

to regulate ..... 

agricultural paper 

discount of to regulate 
bonds, United States 

PURCHASE OF BY FED. ReS. BANKS MAY 

DIRECT . 

REFUNDING, ISSUE OF TO APPROVE 
BRANCH BANKS 

POWERS AS TO . 



Para- 
graph 



13 


89 


13 


88, 90 


14 


99 


11 


74 


11 


75 


7 


53 


4 


26 


14 


100 


14 


96 


13 


87 


15 


101 


7 


54 


11 


80 


7 


53,54 



14 



94 



. 4 


19,20 


. 2 


5 


. 4 


21, 29 


•III} 


87-100 


. 13 


93 


. 11 


74 


. 19 


127-145 


7 


53, 54 


. 11 


80 


. * 7 


55 


. 16 


116 



4 
11 

13 



18 
18 



47 

81 

88 



119,120 
124,126 

17 



192 



INDEX TO STATUTE. 



1 i.dkkai. Reserve Boakd — Continued. 

central reserve gitim 

to determine ..... 
chairman 

Federal Reserve banks to appoint 
clearing house 

may act as ..... 

may require fed. res. banks to act as 
collection charges, to fix 
commercial paper, eligibility of to de- 
CIDE ....... 

DEPUTY CHAIRMAN, FED. ReS. BANKS TO 

APPOINT ...... 

DIRECTORS 

OF BRANCH BANKS TO APPOINT 3 

of Fed. Res. banks to appoint Class C 

DISCOUNT RATES, FED. ReS. BANKS' POWERS 
AS TO . 

districts, Fed. Res. may readjust 
employees 

appointment of .... 

civil service not to apply 

EXAMINATIONS OF FED. ReS. BANKS BY 

EXPENSES OF ..... 

FARM LOANS, MAY RESTRICT 

FEDERAL ADVISORY COUNCIL, TO CALL MEET- 
INGS OF ...... 

FIRST MEETING OF . 

GOVERNOR OF . 

LIQUIDATION OF Fed. ReS. BANKS BY 

MEMBERSHIP OF .... . 

NOTE ISSUES OF Fed. ReS. BANKS 

INTEREST ON TO FIX .... 

REGULATION OF .... 

OFFICERS OF FED. ReS. BANKS MAY REMOVE 

Organization Committee, 

review over decisions of 
powers, general ..... 
qualifications of . 
re-discounting 

bills to regulate .... 

Fed. Res. banks for one another to 

CONTROL ..... 

non-member banks powers as to 
reduction of capital stock by national 

banks to approve .... 
report to Congress by 
re8erve banks may revoke powers when 



Section 



11 



13 



Para- 
graph 



37, 47 



16 


116 


16 


116 


16 


115 


13 


ss 


4 


47 


3 


17 


4 


37, 47 


14 


99 


2 


4 


11 


84 


11 


84 


21 


152 


10 


66 


24 


158 


12 


85 


10 


67 


10 


65 


11 


80 


10 


64 


16 


106 


S 11 


76 


lie 


103-106 


n 


7s 


2 


4 


11 


72-84 


10 


65 



93 



11 


74 


19 


142 


28 


164 


10 


70 


2 


8 



INDEX TO STATUTE. 



193 



Federal Reserve Board — Continued. 

reserve cities to determine 
reserve requirements, powers as to . 
restrictions on .... 
salaries of ..... . 

in Fed. Res. banks to approve 
state banks 

admission of by . . . 

expulsion of by 
statements of fed. res. banks to pub- 
LISH ....... 

SUBSCRIPTION TO STOCK OF FED. ReS. 

BANKS TO CALL ..... 
SUSPENSION OF FED. ReS. BANKS BY 
TERM OF OFFICE ..... 
TRANSFER OF FUNDS BY FED. ReS. BANKS 

MAY REGULATE ..... 
TRANSFER OF STOCK IN FED. RES. BANKS 

TO REGULATE ..... 
TRUSTEES, MAY PERMIT NATIONAL BANKS 

TO ACT AS ..... 

United States bonds 

PURCHASED OF BY FED. ReS. BANKS MAY 

DIRECT ..... 

REFUNDING, ISSUE OF TO APPROVE 
VACANCIES ON ..... 





Para- 


ection 


graph 


11 


77 


11 


75 


10 


65, 67 


10 


64 


4 


48 


9 


59, 60 


9 


63 



11 



73 



2 




6 


11 




80 


10 




65 


16 




116 


2 




15 


11 




83 


18 


119, 


120 


18 


124, 


126 


10 


67, 


68 



Federal Reserve cities, how designated 



Federal Reserve Districts 

apportioned how . . . . . 

Fed. Res. Board may readjust . 

NUMBER ...... 

ORGANIZATION COMMITTEE TO DETERMINE 



Federal Reserve Notes (see Note Issues) 

Finance Bills 

ineligible for discount by fed. rts. bks. 

Foreign Agencies of Fed. Res. Banks 

Foreign Branches of National Banks 

Government Deposits .... 

Governor of Federal Reserve Board 

Interest (see Also Discount Rate) 
on Federal Reserve notes 



. 13 


88 


. 14 


100 


. 25 


159 


. 15 


101 


. 10 


65 



16 



106 



194 



INDEX TO STATUTE. 



liability 

Federal Reserve bank stockholders 

national bank 
directors for violation op act 
dissolution, after compulsory 
stockholders ..... 

Maturity 

of eligible acceptances 

of eligible agricultural paper . 

of eligible commercial paper 

Member Banks 

acceptance of act by ... 

deposits with non-members restricted 
insolvency of . . . . 

national banks as .... 

re-discounting for non-members re- 
stricted ...... 

reserves of (see reserves) 

state banks as .... . 

stock subscription by 

INITIAL ...... 

when capital increased 

National Banks 

acceptance of act by . 
capital stock, reduction of 
conversion into, by other banks 
farm loans by .... 
foreign branches, may establish 
indebtedness limited .... 
liability of stockholders 
outside United States, provisions as to 
reserve of (see also reserves) 
stock subscription by ... 

trustees, registrars, etc., may act as 

Net Earnings Of Fed. Res. Banks, How Used 

Non-Member Banks 

member banks deposits with restricted 
re-discounting through member banks 
restricted ...... 

Note Issues 

of Federal Reserve banks 
bond secured 
Federal Reserve notes 
collateral for 
collateral how changed 



Section 



Para- 
graph 



2 


9 


2 


10 


. 23 


156 


. 13 


89 


. 13 


88 


. 13 


88 


. 2 


6 


. 19 


142 


. 6 


52 


. 2 


6 


19 


142 


19 


129-141 


9 


59-63 


. 2 


6 


. 5 


51 


. 2 


6 


. 28 


164 


. 8 


56-58 


. 24 


157 


. 25 


159 


. 13 


92 


. 23 


156 


. 19 


145 


. 19 


129-140 


. 2 


6 


. 11 


83 


. 7 


53, 54 


. 19 


142 


. 19 


142 


:tf 


29 


122,123 


. 16 


103-114 


. 16 


104 


. 16 


109 



INDEX TO STATUTE. 



195 



Note Issues — Continued. 

of Federal Reserve banks — Continued 
Federal Reserve notes. — Continued. 

ENGRAVING OF 
EXPENSES OF 
FORM OF . 

interest on 
issued how 

liability for, how reduced . 
lien of, on assets 
redemption of 
redemption fund for 
re-issue penalized when 
reserve against 
obligation of united states 
receivable for what 
tax on, when reserve deficient 
of national banks, retirement of 

Open Market Operations By Fed. Res. Bks. 

Organization Committee 

CAPITAL STOCK REDUCTIONS BY NAt'l BKS. 

TO APPROVE ..... 

CERTIFICATES OF FED. ReS. DISTRICTS TO 

FILE . . . . 

CHAIRMAN OF FED. ReS. Board's DUTIES 

TO PERFORM ..... 

CLASSIFICATION OF BANKS BY 
DECISIONS REVIEWABLE BY FED. ReS. 

Board ...... 

duties of ..... 

expenses of ..... 

investigation by .... 

meetings of bank directors may call 

membership of 

reserve banks, may revoke powers 

OF WHEN ..... 

state banks may admit 

stock subscriptions may call . 

Penalties 

on Federal Reserve banks 

for violation of act 
on national banks 

for failing to become member banks 
on reserve banks 
on all banks .... 

for violation of act 

Redemption 

of Federal Reserve notes 



Para- 
Section graph 





16 


110-114 




16 


112 




16 


110 




16 


106 




16 


104,106 




16 


107 




16 


106 




16 


103, 105 




16 


105,106 




16 


105, 107 




16 


105 




16 


103 




. 16 


103 




11 


75 




18 
14 


118 
94 



28 



11 



164 
18 



4 


37, 49 


4 


42 


2 


4 


2 


4 


2 


16 


2 


5 


4 


49 


2 


4 


2 


8 


9 


59 


2 


6 



80 



2 


8 


2 


9 


2 


9 



16 



103 



196 



INDEX TO STATUTE. 



Redemption Fund 

emergency currency .... 

Federal Reserve notes 

National banks not to count as reserve 

Re-Discount 

or bills, etc. ..... 

of one Fed. Res. bank for another 

Reserve Banks 

non-accepting banks shall cease to act 

AS ...... . 

status under act . . . . 

Reserve Cities 

not changed by act .... 
Federal Reserve Board may change 

Reserve 

of Federal Reserve banks 

for deposits ..... 

for notes ..... 

of member banks 

bank deposits, reserve against, how 
ascertained 

central reserve city banks 

checks against 

commerf ial paper as 

country banks 

deficient, to be restored 

demand deposits 

established when 

time deposits 

reserve city banks 
of state banks 
of trust companies 
redemption fund not to count as 
requirements, fed. res. board may sus- 
PEND ...... 

Secretary Of Agriculture 

Organization Committee member 

Secretary Of The Treasury 

chairman Fed. Res. Board 
emergency currency, powers as to 
Organization Committee member 
powers unaffected 
refunding 3s, to issue 



Section 

27 
16 
20 



13 
11 



2 

ll 



Para- 
graph 

163 
106 

146 



93 
74 



8 
16 



16 

77 



16 


105 


16 


10.") 


19 


144 


19 


139, 140 


19 


143 


19 


141 


19 


129-133 


19 


143 



19 129,134,139 

19 128 

19 129,134,139 

19 134-138 

19 142 

19 142 

20 146 



11 



77) 



. 10 


64, 67 


. 27 


163 


2 


4 


. 10 


69 


. 18 


124 126 



INDEX TO STATUTE. 



197 



Shareholders 

liability of 

in Federal Reserve banks 
in dissolved national banks 
in national banks 

national banks as 

public as ... 

United States as 

State Banks 

conversion into national banks 
emergency currency may issue when 
membership in fed. res. banks 

capital requirements 

expulsion from 

limitation on loans 

penalties subject to 

reports required 
reserve of 

Stock (See Capital Stock) 

Stockholders (See Shareholders) 

Subscription 

to capital stock fed. res. banks 
by national banks 
by other banks . 

by public . 

by Treasury . 

Surplus 

of Federal Reserve banks 

Taxation 

of Federal Reserve banks 

of deficient reserves in Fed. Res. bks 

Transfer Of Funds 

by Fed. Res. banks . 

Trust Companies 

emergency currency may issue when 
membership in fed. res. banks 

in Dist. of Columbia 
reserves of . 





Para- 


Section 


graph 


2 


7 


2 


10 


23 


156 


2 • 


6 


2 


11, 12 


2 


13 


8 


56-58 


27 


163 


9 


60 


9 


63 


9 


61 


9 


62 


9 


62 


.19 


142 



2 


6 


2 


6 


2 


11,12 


2 


13 



7 
11 



16 



63-65 



65 
75 



116 



27 


163 


9 


59-63 


2 


6 


19 


142 



198 INDEX TO STATUTE. 

Para- 
Section graph 

Trustees 

National banks may act as . . .11 s.'> 

United States Bonds (See Bonds, United States) 

Vice Governor 

of Federal Reserve Board . . .10 65 

Visitatorial Powers 

restrictions on . . . . .21 151 

Voting Power 

of member banks ..... 4 42-46 

of public stock in Fed. Res. banks . .2 14 



OTHER STATUTES. 



Referred To In Federal Reserve Act. 

the aldrich-vreeland act. 

Act May 30, 1908. 

An Act Authorizing National Currency Associations, the Issue of Ad- 
ditional National Bank Circulation, and Creating a National 
Monetary Commission. 

FORMATION OF NATIONAL CURRENCY ASSOCIATIONS. CONDITIONS 
UNDER WHICH BANKS BELONGING TO NATIONAL CURRENCY AS- 
SOCIATIONS MAY TAKE OUT ADDITIONAL CIRCULATION. 

Be it enacted, etc., That national banking associations, each 
having an unimpaired capital and a surplus of not less than twenty 
per centum, not less than ten in number, having an aggregate capi- 
tal and surplus of at least five millions of dollars, may form voluntary 
associations to be designated as national currency associations. 
The banks uniting to form such association shall, by their presidents 
or vice-presidents, acting under authority from the board of direc- 
tors, make and file with the Secretary of the Treasury a certificate 
setting forth the names of the banks composing the association, the 
principal place of business of the association, and the name of the 
association, which name shall be subject to the approval of the Secre- 
tary of the Treasury. Upon the filing of such certificate. the asso- 
ciated banks therein named shall become a body corporate, and by 
the name so designated and approved may sue and be sued and exer- 
cise the powers of a body corporate for the purposes hereinafter 
mentioned: Provided, that not more than one such national 
currency association shall be formed in any city: Provided further, 
That the several members of such national currency association shall 
be taken as nearly as conveniently may be, from a territory composed 
of a State or part of a State, or contiguous parts of one or more 
States: And provided further, that any national bank in such city 
or territory, having the qualifications herein prescribed for mem- 
bership in such national currency association, shall, upon its appli- 
cation to and upon the approval of the Secretary of the Treasury, 
be admitted to membership in a national currency association for 
that city or territory and upon such admission shall be deemed and 
held a part of the body corporate, and as such entitled to all the 
rights and privileges and subject to all the liabilities of an original 
member: And provided further, That each national currency as- 
sociation shall be composed exclusively of banks not members of 
any other national currency association. 

The dissolution, voluntary or otherwise, of any bank in such 
association shall not affect the corporate existence of the association 



200 THE FEDERAL RESERVE ACT. 

unless there shall then remain less than the minimum number of ten 
banks: Provided, however, That the reduction of the number of 
said banks below the minimum of ten shall not affect the existence of 
the corporation with respect to the assertion of all rights in favor of 
or against such association. The affairs of the association shall be 
managed by a board consisting of one representative from each bank. 
By-laws for the government of the association shall be made by the 
board, subject to the approval of the Secretary of the Treasury. 
A president, vice-president, secretary, treasurer, and an executive 
committee of not less than five members, shall be elected by the 
board. The powers of such board, except in the election of officers 
and making of by-laws, may be exercised through its executive 
committee. 

The national currency association herein provided for shall have 
and exercise any and all powers necessary to carry out the purposes 
of this section, namely, to render available, under the direction and 
control of the Secretary of the Treasury, as a basis for additional 
circulation any securities, including commercial paper, held by a 
national banking association. For the purpose of obtaining such 
additional circulation, any bank belonging to any national currency 
association, having circulating notes outstanding secured by the 
deposit of bonds of the United States to an amount not less than forty 
per centum of its capital stock, and which has its capital unimpaired 
and a surplus of not less than twenty per centum, may deposit with 
and transfer to the association, in trust for the United States, for 
the purpose hereinafter provided, such of the securities above men- 
tioned as may be satisfactory to the board of the association. The 
officers of the association may thereupon, in behalf of such bank. 
make application to the Comptroller of the Currency for an issue of 
additional circulating notes to an amount not exceeding seventy-five 
per centum of the cash value of the securities of commercial paper so 
deposited. The Comptroller of the Currency shall immediately 
transmit such application to the Secretary of the Treasury with such 
recommendation as he thinks proper, and if, in the judgment of the 
Secretary of the Treasury, business conditions in the locality demand 
additional circulation, and if he be satisfied with the character and 
value of the securities proposed and that a lien in favor of the United 
States on the securities so deposited and on the assets of the banks 
composing the association will be amply sufficient for the protection 
of the United States, he may direct an issue of additional circulating 
notes to the association, on behalf of such bank, to an amount in 
his discretion, not, however, exceeding seventy-five per centum of 
the cash value of the securities so deposited: Provided, That upon 
the deposit of any of the State, city, town, county, or other munici- 
pal bonds, of a character described in section three of this Act, cir- 
culating notes maybe issued to the extent of not exceeding ninety per 
centum of the market value of such bonds so deposited: And pro- 
vided further, That no national banking association shall be author- 
ized in any event to issue circulating notes based on commercial 
paper in excess of thirty per centum of its unimpaired capital and 
surplus. The term "commercial paper" shall be held to include 
only notes representing actual commercial transactions, which when 



THE FEDERAL RESERVE ACT. 201 

accepted by the association shall bear the names of at least two 
responsible parties and have not exceeding four months to run. 

The banks and the assets of all banks belonging to the associa- 
tion shall be jointly and severally liable to the United States for the 
redemption of such additional circulation; and to secure such liability 
the lien created by section fifty-two hundred and thirty of the Revised 
Statutes shall extend to and cover the assets of all banks belonging 
to the association, and to the securities deposited by the banks with 
the association pursuant to the provisions of this Act: but as be- 
tween the several banks composing such association each bank shall 
be liable only in the proportion that its capital and surplus bears to 
the aggregate capital and surplus of all such banks. The associa- 
tion may, at any time, require of any of its constituent banks a de- 
posit of additional securities or commercial paper, or an exchange of 
.the securities already on deposit, to secure such additional circulation ; 
and in case of the failure of such bank to make such deposit or ex- 
change, the association may, after ten days' notice to the bank, sell 
the securities and paper already in its hands at public sale, and de- 
posit the proceeds with the Treasurer of the United States as a fund 
for the redemption of such additional circulation. If such fund be 
insufficient for that purpose the association may recover from the 
bank thcamount of the deficiency by suit in the circuit court of the 
United States, and shall have the benefit of the lien herein before 
provided for in favor of the United States upon the assets of such 
bank. The association or the Secretary of the Treasury may per- 
mit or require the withdrawal of any such securities or commercial 
paper and the substitution of other securities or commercial paper 
of equal value therefor. 

REDEMPTION FUND BELOW REQUIREMENTS. DUTY OF TREASURER OF 

UNITED STATES. 

Sec. 2. That whenever any bank belonging to a national cur- 
rency association shall fail to preserve or make good its redemption 
fund in the Treasury of the United States, required by section three 
of the Act of June twentieth, eighteen hundred and seventy-four, 
chapter three hundred and forty-three and the provisions of this 
Act, the Treasurer of the United States shall notify such national 
currency association to make good such redemption fund, and upon 
the failure of such national currency association to make good such 
fund, the Treasurer of the United States may, in his discretion, apply 
so much of the redemption fund belonging to the other banks com- 
posing such national currency association as may be necessary for 
that purpose; and such national currency association may, after 
five days' notice to such bank, proceed to sell at public sale the 
securities deposited by such bank with the association pursuant to 
the provisions of section one of this Act, and deposit the proceeds 
with the Treasurer of the United States as a fund for the redemption 
of the additional circulation taken out by such bank under this act. 



202 THE FEDERAL RESERVE ACT. 

\\1I\T NATIONAL HANKS MAY 4PPLT FOR AUTHORITY TO 1 88 UK ADDI- 
TIONAL CIRCULATION ON BONDS OTHER THAN UNITED STATES 
BONDS. WHAT BONDS WILL BE ACCEPTED FOR SUCH ADDITIONAL 
CIRCULATION. 

Sec. 3. That any national hanking association which has circu- 
lating notes outstanding, secured by the deposit of United States 
bond-* to an amount of not less than forty per centum of its capital 
stock, and which has a surplus of not less than twenty per centum, 
may make application to the Comptroller of the Currency for au- 
thority to issue additional circulating notes to be secured by the 
deposit of bonds other than bonds of the United States. The Comp- 
troller of the Currency shall transmit immediately the application, 
with his recommendation, to the Secretary of the Treasury, who shall, 
if in his judgment business conditions in the locality demand add i- 
tional circulation, approve the same and shall determine the time of 
issue and fix the amount, within the limitations herein imposed, of 
the additional circulating notes to be issued. Whenever after re- 
ceiving notice of such approval any such association shall deposit 
with the Treasurer or any assistant treasurer of the United States 
such of the bonds described in this section as shall be approved in 
character and amount by the Treasurer of the United States and the 
Secretary of the Treasury, it shall be entitled to receive, upon the 
order of the Comptroller of the Currency, circulating notes in blank, 
registered and countersigned as provided by law, not exceeding in 
amount ninety per centum of the market value, but not in excess 
of the par value of any bonds so deposited, such market value to be 
ascertained and determined under the direction of the Secretary of 
the Treasury. 

The Treasurer of the United States, with the approval of the 
Secretary of the Treasury, shall accept as security for the additional 
circulating notes provided for in this section, bonds or other interest- 
bearing obligations of any State of the United States, or any legally 
authorized bonds issued by any city, town, county, or other legally 
constituted municipality or district in the United States, which has 
been in existence for a period of ten years, and which for a period of 
ten years previous to such deposit has not defaulted in the payment 
of any part of either principal or interest of any funded debt author- 
ized to be contracted by it, and whose net funded indebtedness does 
not exceed ten per centum of the valuation of its taxable property, 
to be ascertained by the last preceding valuation of property for the 
assessment of taxes. The Treasurer of the United States, with the 
approval of the Secretary of the Treasury, shall accept, for the pur- 
pose of this section, securities herein enumerated in such proportions 
as he may from time to time determine, and he may with such ap- 
proval at any time require the deposit of additional securities, or 
require any association to change the character of the securities al- 
ready on deposit. 



THE FEDERAL RESERVE ACT. 203 

LEGAL TITLE OF BONDS DEPOSITED TO SECURE ADDITIONAL CIRCULA- 
TION. ASSIGNMENT OF BONDS BY TREASURER TO BE COUNTER- 
SIGNED BY THE COMPTROLLER OF THE CURRENCY. 

Sec. 4. That the legal title of all bonds, whether coupon or 
registered, deposited to secure circulating notes issued in accordance 
with the terms of section three of this Act shall be transferred to the 
Treasurer of the United States in trust for the association depositing 
them, under regulations to be prescribed by the Secretary of the 
Treasury. A receipt shall be given to the association by the Treas- 
urer or any assistant treasurer of the United States, stating that such 
bond is held in trust for the association on whose behalf the transfer 
is made, and as security for the redemption and payment of a re- 
circulating notes that have been or may be delivered to such associa- 
tion. No assignment or transfer of any such bond by the Treasurer 
shall be deemed valid unless countersigned by the Comptroller of 
the Currency. The provisions of sections fifty-one hundred and 
sixty-three, fifty-one hundred and sixty-four, fifty-one hundred and 
sixty-five, fifty-one hundred and sixty-six, and fifty-one hundred and 
sixty-seven, and sections fifty-two hundred and twenty-four to fifty- 
two hundred and thirty-four, inclusive, of the Revised Statutes 
respecting United States bonds deposited to secure circulating 
notes shall, except as herein modified, be applicable to all bonds de- 
posited under the terms of section three of this Act. 

ADDITIONAL CIRCULATION, HOW TREATED. LIMIT TO AMOUNT OF 
CIRCULATION ISSUED TO EACH BANK. LIMIT TO TOTAL AMOUNT 
OUTSTANDING UNDER THIS ACT. 

Sec. o. That the additional circulating notes issued under this 
Act shall be used, held, and treated in the same way as circulating 
notes of national banking associations heretofore issued and secured 
by a deposit of United States bonds, and shall be subject to all the 
provisions of law affecting such notes except as herein expressly 
modified; Provided, That the total amount of circulating notes out- 
standing of any national banking association, including notes secured 
by United States bonds as now provided by law, and notes secured 
otherwise than by deposit of such bonds, shall not at any time ex- 
ceed the amount of its unimpaired capital and surplus; And pro- 
vided further, That there shall not be outstanding at any time cir- 
culating notes issued under the provisions of this Act to an amount 
of more than five hundred millions of dollars. 

AMOUNT OF REDEMPTION FUND. 

Sec. G. That whenever and so long as any national banking 
association has outstanding any of the additional circulating notes 
authorized to be issued by the provisions of this Act it shall keep on 
deposit in the Treasury of the United States in addition to the re- 
demption fund required by section three of the Act of June twentieth, 
eighteen hundred and seventy-four, an additional sum equal to five 



204 THE FEDERAL RESERVE ACT. 

per centum of such additional circulation at any time outstanding, 
such additional five per centum to be treated, held and used in all 
respects in tin- Mine manner as the original redemption fund provided 
for by said section three of the Act of June twentieth, eighteen hun- 
dred and seventy-four. 

EQUITABLE DISTRIBUTION OP NOTES. 

Sec. 7. In order that the distribution of notes to be issued 
under the provisions of this Act shall be made as equitable as practi- 
cable between the various sections of the country, the Secretary of 
the Treasury shall not approve applications from associations in 
any State in excess of the amount to which such State would be en- 
titled of the additional notes herein authorized on the basis of the 
proportion which the unimpaired capital and surplus of the national 
banking associations of such State bears to the total amount of un- 
impaired, capital and surplus of the national banking associations 
of the United States: Provided, however, That in case the applica- 
tions from associations in any State shall not be equal to the amount 
which the associations of such State would be entitled to under this 
method of distribution, the Secretary of the Treasury may, in his 
discretion, to meet an emergency, assign the amount not thus applied 
for to any applying association or associations in States in the same 
section of the country. 

SECRETARY OF THE TREASURY TO FURNISH INFORMATION AS TO THE 
VALUE AND CHARACTER OF SECURITIES. 

Sec. 8. That it shall be the duty of the Secretary of the Treas- 
ury to obtain information with reference to the value and character 
of the securities authorized to be accepted under the provisions of 
this Act, and he shall from time to time furnish information to na- 
tional banking associations as to such securities as would be accept- 
able under the provisions of this Act. 

TAXES PAYABLE TO THE UNITED STATES. 

Sec. 9. That section fifty-two hundred and fourteen of the 
Revised Statutes, as amended, be further amended to read as follows: 

"Sec. 5214. National banking associations having on deposit 
bonds of the United States, bearing interest at the rate of two per 
centum per annum, including the bonds issued for the construction 
of the Panama Canal, under the provisions of section eight of 'An 
Act to provide for the construction of a canal connecting the waters 
of the Atlantic and Pacific Oceans,' approved June twenty-eighth, 
nineteen hundred and two, to secure its circulating notes, shall pay 
to the Treasurer of the United States, in the months of January and 
July, a tax of one-fourth of one per centum each half year upon 
the average amount of such of its notes in circulation as are based 
upon the deposit of such bonds; and such associations having on 
deposit bonds of the United States bearing interest at a rate higher 



THE FEDERAL RESERVE ACT. 205 

than two per centum per annum shall pay a tax of one-half of one 
per centum each half year upon the average amount of such of its 
notes in circulation as are ba«ed upon the deposit of such bonds. 
[National banking associations having circulating notes secured 
otherwise than by bonds of the United States shall pay for the first 
month a tax at the rate of five per centum per annum upon the 
average amount of such of their notes in circulation as are based 
upon the deposit of such securities, and afterwards an additional 
tax of one per centum per annum for each month until a tax of ten 
per centum per annum is reached, and thereafter such tax of ten per 
centum per annum upon the average amount of such notes.]* Every 
national banking association having outstanding circulating notes 
secured by a deposit of other securities than United States bonds 
shall make monthly returns, under oath of its president or cashier, 
to the Treasurer of the United States, in such form as the Treasurer 
may prescribe, of the average monthly amount of its notes so se- 
cured in circulation; and it shall be the duty of the Comptroller of 
the Currency to cause such reports of notes in circulation to be veri- 
fied by examination of the banks' records. The taxes received on 
circulating notes secured otherwise than by bonds of the United 
States shall be paid into the Division of Redemption of the Treasury 
and credited and added to the reserve fund held for the redemption 
of United States and other notes." 



WITHDRAWAL OF CIRCULATING NOTES ON DEPOSIT OF LAWFUL MONEY, 
AND WITHDRAWAL OF BONDS. NOT MORE THAN NINE MILLIONS 
TO BE DEPOSITED DURING ANY CALENDAR MONTH. WITHDRAWAL 
OF ADDITIONAL CIRCULATION ON DEPOSIT OF LAWFUL MONEY ON 
NATIONAL BANK NOTES. 

Sec. 10. That section nine of the Act approved July twelfth, 
eighteen hundred and eighty-two, as amended by the Act approved 
March fourth, nineteen hundred and seven, be further amended to 
read as follows : 

"Sec. 9. That any national banking association desiring to 
withdraw its circulating notes, secured by deposit of United States 
bonds in the manner provided in Section four of the Act approved 
June twentieth, eighteen hundred and seventy-four is hereby au- 
thorized for that purpose to deposit lawful money with the Treasurer 
of the United States and, with the consent of the Comptroller of 
the Currency and the approval of the Secretary of the |Treasury, 
to withdraw a proportionate amount of bonds held as security for 



•Amended by the Federal Reserve Act, Sec. 27, to read: 

National banking associations having circulating notes secured otherwise than 
by bonds of the United States, shall pay for the first three months a tax at the rate 
of three per centum per annum upon the average amount of such of their notes in 
circulation as are based upon the deposit of such securities, and afterwards an addi- 
tional tax rate of one-half of one per centum per annum for each month until a tax 
of six per centum per annum is reached, and thereafter such a tax of six per centum 
per annum upon the average amount of such notes. 



206 THE FEDERAL RESERVE ACT. 

its circulating notes in the order of sueh deposits: Provided, That 
not more than nine millions of dollars of lawful money shall be so 
deposited during any i -alcndar month for this purpose. 

"Any national banking association desiring to withdraw any 
of its circulating notes, secured by the deposit of securities other than 
bonds of the United States, may make such withdrawal at any time 
in like manner and effect by the deposit of lawful money, or national 
bank notes with the Treasurer of the United States, and upon such 
deposit a proportionate share of the securities so deposited may be 
withdrawn: Provided, That the deposits under this section to re- 
tire notes secured by the deposit of securities other than bonds of 
the United States shall not be covered into the Treasury, as required 
by section six of an Act entitled 'An Act directing the purchase of 
silver bullion and the issue of Treasury notes thereon, and for other 
purposes,' approved July fourteenth, eighteen hundred and ninety, 
but shall be retained in the Treasury for the purpose of redeeming 
the notes of the bank making such deposit." 

PRINTING, DENOMINATION, AND FORM OF THE CIRCULATING NOTES^ 

Sec. 11. That section fifty-one hundred and seventy-two of 
the Revised Statutes be, and the same is hereby, amended to read as 
follows: 

"Sec. 5172. In order to furnish suitable notes for circulation, 
the Comptroller of the Currency shall, under the direction of the 
Secretary of the Treasury, cause plates and dies to be engraved, in 
the best manner to guard against counterfeiting and fraudulent altera- 
tions, and shall have printed therefrom, and numbered, such quan- 
tity of circulating notes, in blank, of the denominations of five dol- 
lars, ten dollars, twenty dollars, fifty dollars, one hundred dollars, 
five hundred dollars, one thousand dollars, and ten thousand dol- 
lars, as may be required to supply the associations entitled to receive 
the same. Such notes shall state upon their face that they are se- 
cured by United States bonds or other securities, certified by the 
written or engraved signatures of the Treasurer and Register and by 
the imprint of the seal of the Treasury. They shall also express 
upon their face the promise of the association receiving the same to 
pay on demand, attested by the signature of the president or vice- 
president and cashier. The Comptroller of the Currency, acting 
under the direction of the Secretary of the Treasury, shall as soon as 
practicable cause to be prepared circulating notes in blank, registered 
and countersigned, as provided by law, to an amount equal to fifty 
per centum of the capital stock of each national banking association; 
such notes to be deposited in the Treasury or in the sub-treasury of 
the United States nearest the place of business of each association, 
and to be held for such association, subject to the order of the Comp- 
troller of the Currency, for their delivery as provided by law: Pro- 
vided, That the Comptroller of the Currency may issue national 
bank notes of the present form until plates can be prepared and cir- 
culating notes issued as above provided; Provided, however, That. 



THE FEDERAL RESERVE ACT. 207 

in no event shall bank notes of the present form be issued to any bank 
as additional circulation provided for by this Act." 

CIRCULATING NOTES TO BE REDEEMED IN LAWFUL MONEY OF THE 

UNITED STATES. 

Sec. 12. That circulating notes of national banking associa- 
tions, when presented to the Treasury for redemption, as provided 
in section three of the Act approved June twentieth, eighteen hun- 
dred and seventy-four, shall be redeemed in lawful money of the 
United States. 

ALL ACTS OF THE COMPTROLLER OF THE CURRENCY AND TREASURER 
OF THE UNITED STATES UNDER THIS ACT TO BE APPROVED BY THE 
SECRETARY OF THE TREASURY. 

Sec. 13. That all acts and orders of the Comptroller of the Cur- 
rency and the Treasurer of the United States authorized by this Act 
shall have the approval of the Secretary of the Treasury who shall 
have power, also, to make any such rules and regulations and exercise 
such control over the organization and management of national 
currency associations as may be necessary to carry out the purposes 
of this Act. 

NO RESERVE NEED BE HELD AGAINST DEPOSITS OF PUBLIC MONEY. 

Sec. 14. That the provisions of section fifty-one hundred and 
ninety-one of the Revised Statutes, with reference to the reserves 
of national banking associations, shall not apply to deposits of public 
moneys by the United States in designated depositaries. 

INTEREST ON PUBLIC DEPOSITS. 

Sec 15. That all national banking associations designated as 
regular depositaries of public money shall pay upon all special and 
additional deposits made by the Secretary of the Treasury in such 
depositaries, and all such associations designated as temporary de- 
positaries of public money shall pay upon all sums of public money 
deposited in such associations interest at such rate as the Secretary 
of the Treasury may prescribe, not less, however, than one per cen- 
tum per annum upon the average monthly amount of such deposits: 
Provided, however, That nothing contained in this Act shall be con- 
strued to change or modify the obligation of any association or any 
of its officers for the safe-keeping of public money: Provided fur- 
ther, That the rate of interest charged upon such deposits shall be 
equal and uniform throughout the United States. 

expenses of act. 

Sec 16. That a sum sufficient to carry out the purposes of 
the preceding sections of this Act is hereby appropriated out of any 
money in the Treasury not otherwise appropriated. 



20S THE FEDERAL RESERVE ACT. 

[Sections 17, 18 and 19, following, were repealed bv Chapter 36, 
Statutes at Large, 1911.] 

[Sec. 17. That a Commission is hereby created to be called 
the " National Monetary Commission," to be composed of nine mem- 
bers of the Senate, to be appointed by the Presiding Officer thereof, 
and nine members of the House of Representatives, to be appointed 
by the Speaker thereof; and any vacancy on the Commission shall 
be filled in the same manner as the original appointment.. 

Sec. 18. That it shall be the duty of this Commission to in- 
quire into and report to Congress at the earliest date practicable, 
what changes are necessary or desirable in the monetary system of the 
United States or in the laws relating to banking and currency, and 
for this purpose they are authorized to sit during the sessions or recess 
of Congress, at such times and places as they may deem desirable, to 
send for persons and papers, to administer oaths, to summons and 
compel the attendance of witnesses, and to employ a disbursing 
officer and such secretaries, experts, stenographers, messengers, 
and other assistants as shall be necessary to carry out the purposes 
for which said "Commission was created. The Commission shall have 
the power through subcommittee or otherwise, to examine witnesses 
and to make such investigations and examinations, in this or other 
countries, of the subjects committed to their charge as they shall 
deem necessary. 

Sec. 19. That a sum sufficient to carry out the purposes of 
sections seventeen and eighteen of this Act, and to pay the necessary 
expenses of the Commission, and its members, is hereby appro- 
priated , out of any money in the Treasury not otherwise appropriated . 
Said appropriation shall be immediately available and shall be paid 
out on the audit and order of the chairman or acting chairman of said 
Commission, which audit and order shall be conclusive and binding 
upon all Departments as to the correctness of the accounts of such 
Commission.] 

(The following paragraph was added by Act of March 4, 1909.) 

That the members of the National Monetary Commission, who 
were appointed on the thirtieth day of May, nineteen hundred and 
eight, under the provisions of section seventeen of the Act entitled 
"An Act to amend the national banking laws," approved May 
thirtieth, nineteen hundred and eight, shall continue to constitute 
the National Monetary Commission until the final report of said 
commission shall be made to Congress; and said National Monetary 
Commission are authorized to pay to such of its members as are not 
at the time in the public service and receiving a salary from the 
Government, a salary equal to that to which said members would be 
entitled if they were members of the Senate or House of Represen- 
tatives. [All Acts and parts of Acts inconsistent with this provision 
are hereby repealed .] 

Sec. 20. That this Act shall expire by limitation on the thirtieth 
day of June, nineteen hundred and fourteen. [Extended by Federal 
Reserve Act to June 30, 1915.] 



THE FEDERAL RESERVE ACT. 209 



CURRENCY ACT. 

Act March 14, 1900. 

An Act to Define and Fix the Standard of Value, to Maintain the 
Parity of all Forms of Money Issued or Coined by the United 
States, to Refund the Public Debt, and for Other Purposes. 

GOLD DOLLAR DECLARED TO BE STANDARD UNIT OF VALUE. 

Be it enacted, etc., That the dollar consisting of twenty-five 
and eight-tenths grains of gold nine-tenths fine, as established by 
section thirty-five hundred and eleven of the Revised Statutes of the 
United States, shall be the standard unit of value, and all forms of 
money issued or coined by the United States shall be maintained at 
a parity of value with this standard, and it shall be the duty of the 
Secretary of the Treasury to maintain such parity. 

SECRETARY OF TREASURY TO SET APART AND MAINTAIN A GOLD RESERVE 
OF ONE HUNDRED AND FIFTY MILLION DOLLARS IN GOLD COIN AND 
BULLION FOR THE REDEMPTION OF UNITED STATES NOTES AND 
NOTES ISSUED UNDER ACT OF JULY 14, 1890. MAY SELL BONDS 
TO REPLENISH RESERVE. 

Sec. 2. That United States notes, and Treasury notes issued 
under the Act of July fourteenth, eighteen hundred and ninety, when 
presented to the Treasury for redemption, shall be redeemed in gold 
coin of the standard fixed in the first section of this Act, and in order 
to secure the prompt and certain redemption of such notes as herein 
provided it shall be the duty of the Secretary of the Treasury to set 
apart in the Treasury a reserve fund of one hundred and fifty million 
dollars in gold coin and bullion, which fund shall be used for such 
redemption purposes only, and whenever and as often as any of said 
notes shall be redeemed from said fund it shall be the duty of the 
Secretary of the Treasury to use said notes so redeemed to restore 
and maintain such reserve fund in the manner following, to wit: 
First, by exchanging the notes so redeemed for any gold coin in the 
general fund of the Treasury; second, by accepting deposits of gold 
coin at the Treasury or at any subtreasury in exchange for the United 
States notes so redeemed; third, by procuring gold coin by the use of 
said notes, in accordance with the provisions of section thirty-seven 
hundred of the Revised Statutes of the United States. If the 
Secretary of the Treasury is unable to restore and maintain the gold 
coin, in the reserve fund by the foregoing methods, and the amount 
of such gold coin and bullion in said fund shall at any time fall below 
one hundred million dollars, then it shall be his duty to restore the 
same to the maximum sum of one hundred and fifty million dollars 
by borrowing money on the credit of the United States, and for the 
debt thus incurred to issue and sell coupon or registered bonds of the 
United States, in such form as he may prescribe, in denominations of 
fifty dollars or any multiple thereof, bearing interest at the rate of 



210 THE FEDERAL RESERVE ACT. 

not exceeding three per centum per annum, payable quarterly, such 
bonds to be payable at the pleasure of the United States after one 
year from the date of their issue, and to be payable, principal ;in<l 
interest, in gold coin of the present standard value, and to be exempt 
from the payment of all taxes or duties of the United States, as well 
as from taxation in any form by or under State, municipal, or local 
authority; and the gold coin received from the sale of said bonds shall 
first be covered into the general fund of the Treasury and then ex- 
changed, in the manner hereinbefore provided, for an equal amount 
of the notes redeemed and held for exchange, and the Secretary of 
the Treasury may, in his discretion, use said notes in exchange for 
gold, or to purchase or redeem any bonds of the United States, or 
for any other lawful purpose the public interests may require, ex- 
cept that they shall not be used to meet deficiencies in the current 
revenues. That United States notes when redeemed in accordance 
with the provisions of this section shall be reissued, but shall be held 
in the reserve fund until exchanged for gold, as herein provided; 
and the gold coin and bullion in the reserve fund, together with the 
redeemed notes held for use as provided in this section, shall at no 
time exceed the maximum sum of one hundred and fifty million 
dollars. 

SILVER DOLLAR TO REMAIN LEGAL TENDER. 

Sec. 3. That nothing contained in this Act shall be construed 
to affect the legal-tender quality as now provided by law of the silver 
dollar, or of any other money coined or issued by the United States. 

DIVISIONS OF ISSUE AND REDEMPTION ESTABLISHED. 

Sec. 4. That there be established in the Treasury Department, 
as a part of the office of the Treasurer of the United States, divisions 
to be designated and known as the division of issue and the division 
of redemption, to which shall be assigned, respectively, under such 
regulations as the Secretary of the Treasury may approve, all records 
and accounts relating to the issue and redemption of United States 
notes, gold certificates, silver certificates, and currency certificates. 
There shall be transferred from the accounts of the general fund of 
the Treasury of the United States, and taken up on the books of said 
divisions, respectively, accounts relating to the reserve fund for the 
redemption of United States notes and Treasury notes, the gold coin 
held against outstanding gold certificates, the United States notes 
held against outstanding currency certificates, and the silver dollars 
held against outstanding silver certificates, and each of the funds 
represented by these accounts shall be used for the redemption of 
the notes and certificates for which they are respectively pledged, 
and shall be used for no other purpose, the same being held as trust 
funds. 



THK FEDERAL RESERVE ACT. 211 



WHEN SILVER DOLLARS ARE COINED FROM BULLION PURCHASED UNDER 
ACT OF JULY 14, 1890, AN EQUAL AMOUNT OF TREASURY NOTES TO 
BE CANCELED AND SILVER CERTIFICATES ISSUED. 

Sec. 5. That it shall be the duty of the Secretary of the Treas- 
ury, as fast as standard silver dollars are coined under the provisions 
of the Acts of July fourteenth, eighteen hundred and ninety, and 
June thirteenth, eighteen hundred and ninety-eight, from bullion 
purchased under the Act of July fourteenth, eighteen hundred and 
ninety, to retire and cancel an equal amount of Treasury notes when- 
ever received into the Treasury, either by exchange in accordance 
with the provisions of this Act or in the ordinary course of business, 
and upon the cancellation of Treasury notes silver certificates shall 
be issued against the silver dollars so coined . 

ISSUE OF GOLD CERTIFICATES. 

Sec. 6. (As amended by Chapter 190, Statutes at Large, 191 1 .) 
That the Secretary of the Treasury is hereby authorized and directed 
to receive deposits of gold coin with the Treasurer, or any assistant 
treasurer of the United States, in sums of not less than twenty 
dollars, and to issue gold certificates therefor in denominations of 
not less than ten dollars, and the coin so deposited shall be retained 
in the Treasury and held for the payment of such certificates on de- 
mand, and used for no other purpose. Such certificates shall be 
receivable for customs, taxes, and all public dues, and when so re- 
ceived may be reissued, and when held by any national banking as- 
sociation may be counted as a part of its lawful reserve: Provided, 
That whenever and so long as the gold coin and bullion held in the 
reserve fund in the Treasury for the redemption of United States 
notes and Treasury notes shall fall and remain below one hundred 
million dollars the authority to issue certificates as herein provided 
shall be suspended: and provided further, That whenever and so 
long as the aggregate amount of United States notes and silver certi- 
ficates in the general fund of the Treasury shall exceed sixty million 
dollars the Secretary of the Treasury may, in his discretion, suspend 
the issue of the certificates herein provided for: and provided further, 
That of the amount of such outstanding certificates one-fourth at 
least shall be in denominations of fifty dollars or less: and provided 
further, That the Secretary of the Treasury may, in his discretion, 
issue such certificates in denominations of ten thousand dollars, 
payable to order: and provided further, That the Secretary of the 
Treasury may, in his discretion, receive, with the assistant treasurer 
in New York and the assistant treasurer in San Francisco, deposits 
of foreign gold coin at their bullion value in amounts of not less than 
one thousand dollars in value and issue gold certificates therefor of 
the description herein authorized: and provided further , That the 
Secretary of the Treasury may, in his discretion, receive, with the 
Treasurer or any assistant treasurer of the United States, deposits 
of gold bullion bearing the stamp of the coinage mints of the United 
States, or the assay office in New York, certifying their weight, fine- 



212 THE FEDERAL RESERVE ACT. 

ness, and value, in amounts of not less than one thousand dollars in 
value, and issue gold certificates therefor of the description herein 

authorized. But the amount of gold bullion and foreign coin so 
held shall not at any time exceed one-third of the total amount of 
gold certificates at such time outstanding. And section fifty-one 
hundred and ninety-three of the Revised Statutes of the United 
States is hereby repealed . 

ISSUE OF SILVER CERTIFICATES. 

Sec. 7. That hereafter silver certificates shall be issued only of 
denominations of ten dollars and under, except that not exceeding 
in the aggregate ten per centum of the total volume of said certifi- 
cates, in the discretion of the Secretary of the Treasury, may be 
issued in denominations of twenty dollars, fifty dollars, and one 
hundred dollars; and silver certificates of higher denomination than 
ten dollars, except as herein provided, shall, whenever received at 
the Treasury or redeemed, be retired and canceled, and certificates 
of denominations of ten dollars or less shall be substituted therefor, 
and after such substitution in whole or in part, a like volume of 
United States notes pf less denomination than ten dollars shall 
from time to time be retired and canceled , and notes of denominations 
of ten dollars and upward shall be reissued in substitution therefor, 
with like qualities and restrictions as those retired and canceled. 

SUBSIDIARY SILVER COINAGE. 

Sec. S. That the Secretary of the Treasury is hereby authorized 
to use, at his discretion, any silver bullion in the Treasury of the 
United States purchased under the Act of July fourteenth, eighteen 
hundred and ninety, for coinage into such denominations of subsidiary 
silver coin as may be necessary to meet the public requirements for 
such coin: Provided, That the amount of subsidiary silver coin 
outstanding shall not at any time exceed in the aggregate one hun- 
dred millions of dollars. Whenever any silver bullion purchased 
under the Act of July fourteenth, eighteen hundred and ninety, 
shall be used in the coinage of subsidiary silver coin, an amount of 
Treasury notes issued under said Act equal to the cost of the bullion 
contained in such coin shall be canceled and not reissued. 

RECOINAGE OF UNCURRENT SUBSIDIARY SILVER COIN. 

Sec. 9. That the Secretary of the Treasury is hereby authorized 
and directed to cause all worn and uncurrent subsidiary silver coin 
of the United States now in the Treasury, and hereafter received, to 
be recoined, and to reimburse the Treasurer of the United States for 
the difference between the nominal or face value of such coin and the 
amount the same will produce in new coin from any moneys in the 
Treasury not otherwise appropriated. 



THE FEDERAL RESERVE ACT. 213 



REQUISITE AMOUNT OF CAPITAL. 

Sec. 10. No association shall be organized with a less capital 
than one hundred thousand dollars, except that banks with a capital 
of not less than fifty thousand dollars may, with the approval of the 
Secretary of the Treasury, be organized in any place the population 
of which does not exceed six thousand inhabitants, and except that 
banks with a capital of not less than twenty-five thousand dollars 
may, with the sanction of the Secretary of the Treasury, be organized 
in any place the population of which does not exceed three thousand 
inhabitants. No association shall be organized in a city the popula- 
tion of which exceeds fifty thousand persons with a capital of less 
than two hundred thousand dollars. 



REFUNDING OF UNITED STATES BONDS. 

Sec. 11. That the Secretary of the Treasury is hereby author- 
ized to receive at the Treasury any of the outstanding bonds of the 
United States bearing interest at five per centum per annum, pay- 
able February first, nineteen hundred and four, and any bonds of the 
United States bearing interest at four per centum per annum, pay- 
able July first, nineteen hundred and seven, and any bonds of the 
United States bearing interest at three per centum per annum, pay- 
able August first, nineteen hundred and eight, and to issue in ex- 
change therefor an equal amount of coupon or registered bonds of the 
Tinted States in such form as he may prescribe, in denominations 
of fifty dollars or any multiple thereof, bearing interest at the rate 
of two per centum per annum, payable quarterly, such bonds to be 
payable at the pleasure of the United States after thirty years from 
the date of their issue, and said bonds to be payable, principal and 
interest, in gold coin of the present standard value, and to be exempt 
from the payment of all taxes or duties of the United States, as well 
as from taxation in any form by or under State, municipal, or local 
authority: Provided , That such outstanding bonds may be received 
in exchange at a valuation not greater than their present worth to 
yield an income of two and one-quarter per centum per annum; 
and in consideration of the reduction of interest effected the Secre- 
tary of the Treasury is authorized to pay to the holders of the out- 
standing bonds surrendered for exchange, out of any money in the 
Treasury not otherwise appropriated, a sum not greater than the 
difference between their present worth, computed as aforesaid, and 
their par value, and the payments to be made hereunder shall be 
held to be payments on account of the sinking fund created by sec- 
tion thirty-six hundred and ninety-four of the Revised Statutes; 
and provided further , That the two per centum bonds to be issued 
under the provisions of this Act shall be issued at not less than par, 
and they shall be numbered consecutively in the order of their issue, 
and when payment is made the last numbers issued shall be first 
paid, and this order shall be followed until all the bonds are paid, 
and whenever any of the outstanding bonds are called for payment 
interest thereon shall cease three months after such call; and there 



214 THE FEDERAL RESERVE ACT. 

is hereby appropriated out of any money in the Treasury not other- 
wise appropriated, to effeet the exchanges of bonds provided for in 
this Act, a sum not exceeding one-fifteenth of one per centum of the 
face value of said bonds, to pay the expense of preparing and issuing 
the same and other expenses incident thereto. 

DELIVERY OF CIRCULATING NOTES. 

Sec. 12. That upon the deposit with the Treasurer of the 
United States, by any national banking association, of any bonds of 
the United States in the manner provided by existing law, such as- 
sociation shall be entitled to receive from the Comptroller of the 
Currency circulating notes in blank, registered and countersigned as 
provided by law, equal in amount to the par value of the bonds so 
deposited; and any national banking association now having bonds 
on deposit for the security of circulating notes, and upon which an 
amount of circulating notes has been issued less than the par value 
of the bonds, shall be entitled, upon due application to the Comp- 
troller of the Currency, to receive additional circulating notes in 
blank to an amount which will increase the circulating notes held by 
such association to the par value of the bonds deposited, such addi- 
tional notes to be held and treated in the same way as circulating 
notes of national banking associations heretofore issued, and subject 
to all the provisions of law affecting such notes: Provided, That 
nothing herein contained shall be construed to modify or repeal the 
provisions of section fifty-one hundred and sixty-seven of the Re- 
vised Statutes of the United States, authorizing the Comptroller of 
the Currency to require additional deposits of bonds or of lawful 
money in case the market value of the bonds held to secure the cir- 
culating notes shall fall below the par value of the circulating notes 
outstanding for which such bonds may be deposited as security: 
And provided further, That the circulating notes furnished to na- 
tional banking associations under the provisions of this Act shall be 
of the denominations prescribed by law, except that no national 
banking association shall, after the passage of this Act, be entitled 
to receive from the Comptroller of the Currency, or to issue or re- 
issue or place in circulation, more than one-third in amount of its 
circulating notes of the denomination of five dollars: And provided 
further, That the total amount of such notes issued to any such 
association may equal at any time but shall not exceed the amount 
at such time of its capital stock actually paid in: And provided 
further, That under regulations to be prescribed by the Secretary 
of the Treasury any national banking association may substitute 
the two per centum bonds issued under the provisions of this Act 
for any of the bonds deposited with the Treasurer to secure circula- 
tion or to secure deposits of public money; and so much of an Act 
entitled "An Act to enable national banking associations to extend 
their corporate existence, and for other purposes," approved July 
twelfth, eighteen hundred and eighty-two, as prohibits any national 
bank which makes any deposit of lawful money in order to withdraw 
its circulating notes from receiving any increase of its circulation for 



THE FEDERAL RESERVE ACT. 215 

the period of six months from the time it made such deposit of law- 
ful money for the purpose aforesaid, is hereby repealed, and all other 
Acts or parts of Acts inconsistent with the provisions of this section 
are hereby repealed. 

TAX ON CIRCULATING NOTES. 

Sec. 13. That every national banking association having on 
deposit, as provided by law, bonds of the United States bearing in- 
terest at the rate of two per centum per annum, issued under the 
provisions of this Act, to secure its circulating notes, shall pay to the 
Treasurer of the United States, in the months of January and July, 
a tax of one-fourth of one per centum each half year upon the average 
amount of such of its notes in circulation as are based upon the de- 
posit of said two per centum bonds; and such taxes shall be in lieu 
of existing taxes on its notes in circulation imposed by section fifty- 
two hundred and fourteen of the Revised Statutes. 

INTERNATIONAL BIMETALLISM. 

Sec. 14. That the provisions of this Act are not intended to 
preclude the accomplishment of international bimetallism whenever 
conditions shall make it expedient and practicable to secure the same 
by concurrent action of the leading commercial nations of the world 
and at a ratio which shall insure permanence of relative value be- 
tween gold and silver. 



SECTIONS OF REVISED STATUTES. 



Referred To In Federal Reserve Act. 
Sec. 5153 (As prior to May 30, 1908). 

NATIONAL BANKING ASSOCIATIONS TO BE DEPOSITARIES OF PIT BMC 

MONEYS. 

All national banking associations, designated for that purpose 
by the Secretary of the Treasury, shall be depositaries of public 
money, under such regulations as may be prescribed by the Secre- 
tary; and they may also be employed as financial agents of the Gov- 
ernment; and they shall perform all such reasonable duties, as de- 
positaries of public money and financial agents of the Government, 
as may be required of them. The Secretary of the Treasury shall 
require the associations thus designated to give satisfactory security, 
by the deposit of United States bonds and otherwise, for the safe 
keeping and prompt payment of the public money deposited with 
them, and for the faithful performance of their duties as financial 
agents of the Government: Provided, That the Secretary shall, on 
or before the first of July of each year, make a public statement of 
the securities required during that year for such deposits. And 
every association so designated as receiver or depositary of the public 
money shall take and receive at par all of the national currency bills, 
by whatever association issued, which have been paid into the Gov- 
ernment for internal revenue, or for loans or stocks: Provided, 
That the Secretary of the Treasury shall distribute the deposits 
herein provided for, as far as practicable, equitably between the 
different States and sections. 

Sec. 5172 (As prior to May 30, 1908). 

PRINTING, DENOMINATIONS, AND FORM OF THE CIRCULATING NOTES. 

In order to furnish suitable notes for circulation, the Comptroller 
of the Currency shall, under the direction of the Secretary of the 
Treasury, cause plates and dies to be engraved, in the best manner 
to guard against counterfeiting and fraudulent alterations, and shall 
have printed therefrom, and numbered, such quantity of circulating 
notes in blank, of the denominations of one dollar, two dollars, three 
dollars, five dollars, ten dollars, twenty dollars, fifty dollars, one 
hundred dollars, five hundred dollars, and one thousand dollars, as 
may be required to supply the associations entitled to receive the 
same. Such notes shall express upon their face that they are secured 



THE FEDERAL RESERVE ACT. 217 

by United States bonds, deposited with the Treasurer of the United 
States, by the written or engraved signatures of the Treasurer and 
Register, and by the imprint of the seal of the Treasury; and shall 
also express upon their face the promise of the association receiving 
the same to pay on demand, attested by the signatures of the presi- 
dent or vice-president and cashier; and shall bear such devices and 
such other statements, and shall be in such form, as the Secretary 
of the Treasury shall, by regulation, direct. 

That the Comptroller of the Currency shall, under such rules 
and regulations as the Secretary of the Treasury may prescribe, cause 
the charter-numbers of the association to be printed upon all national- 
bank notes which may be hereafter issued by him. 

That the national-bank notes shall be printed under the direction 
of the Secretary of the Treasury, and upon the distinctive or special 
paper which has been, or may hereafter be, adopted by him for print- 
ing United States notes. 



Sec. 5191 (As prior to May 30, 1908). 

RESERVE CITIES AND RESERVE REQUIREMENTS. 

Every national banking association in either of the following 
cities: Albany, Baltimore, Boston, Cincinnati, Chicago, Cleveland, 
Detroit, Louisville, Milwaukee, New Orleans, New York, Phila- 
delphia, Pittsburgh, Saint Louis, San Francisco, and Washington, 
shall at all times have on hand, in lawful money of the United States, 
an amount equal to at least twenty-five per centum of the aggregate 
amount of its deposits; and every other association shall at all times 
have on hand, in lawful money of the United States, an amount 
equal to at least fifteen per centum of the aggregate amount of its 
deposits. Whenever the lawful money of any association in any of 
the cities named shall be below the amount of twenty-five per cen- 
tum of its deposits, and whenever the lawful money of any other 
association shall be below fifteen per centum of its deposits, such as- 
sociation shall not increase its liabilities by making any new loans or 
discounts otherwise than by discounting or purchasing bills of ex- 
change payable at sight, nor make any dividend of its profits until 
the required proportion, between the aggregate amount of its de- 
posits and its lawful money of the United States has been restored. 
And the Comptroller of the Currency may notify any association, 
whose lawful-money reserve shall be below the amount above re- 
quired to be kept on hand, to make good such reserve; and if such 
association shall fail for thirty days thereafter so to make good its 
reserve of lawful money, the Comptroller may, with the concurrence 
of the Secretary of the Treasury, appoint a receiver to wind up the 
business of the association, as provided in section fifty-two hundred 
and thirtv-four. 



218 THE FEDERAL RESERVE ACT. 

Sec. 5214 (As prior to May 30, 1908). 

DUTIES PAYABLE TO THE UNITED STATUS. 

In lieu of all existing taxes, every association shall pay to the 
Treasurer of the United States, in the months of January and July, 
a duty of one-half of one per centum each half-year upon the average 
amount of its notes in circulation, and a duty of one-quarter of one 
per centum each half-year upon the average amount of its deposits, 
and a duty of one-quarter of one per centum each half-year on the 
average amount of its capital stock, beyond the amount invested in 
United States Bonds. 1 

Sec. 5174. 

EXAMINATION OF PLATES AND DIES. 

The Comptroller of the Currency shall cause to be examined, 
each year, the plates, dies, bed-pieces, and other material from which 
the national bank circulation is printed, in whole or in part, and file 
in his office annually a correct list of the same. Such material as 
shall have been used in the printing of the notes of associations which 
are in liquidation, or have closed business, shall be destroyed under 
such regulations as shall be prescribed by the Comptroller of the Cur- 
rency and approved by the Secretary of the Treasury. The expenses 
of any such examination or destruction shall be paid out of any ap- 
propriation made by Congress for the special examination of national 
banks and bank note plates. 

Sec. 5192. 

WHAT MAY BE COUNTED AS RESERVE. 

Three-fifths of the reserve of fifteen per centum required by the 
preceding section 2 to be kept, may consist of balances due to an as- 
sociation, available for the redemption of its circulating notes, from 
associations approved by the Comptroller of the Currency, organized 
under the act of June three, eighteen hundred and sixty-four, or 
under this Title, and doing business in the cities of Albany, Baltimore, 
Boston, Charleston, Chicago, Cincinnati, Cleveland, Detroit, Louis- 
ville, Milwaukee, New Orleans, New York, Philadelphia, Pittsburgh, 
Richmond, Saint Louis, San Francisco, and Washington. Clearing- 
house certificates, representing specie or lawful money specially 
deposited for the purpose, of any clearing-house association, shall 
also be deemed to be lawful money in the possession of any asso- 
ciation belonging to such clearing-house, holding and owning such 
certificate, within the preceding section. 



1 Sec. 5191, supra p. ? 

1 See Sect. 13, Act March 14, 1900, supra p. 



THE FEDERAL RESERVE ACT. 219 

Act June 20, 1874. 

"lawful-money reserve" to be determined by deposits. 

Sec. 2. That section thirty-one iSec. 5191 R. S.] of "The 
National Bank Act" be so amended that the several associations 
therein provided for shall not hereafter be required to keep on hand 
any amount of money whatever, by reason of the amount of their 
respective circulations; but the moneys required by said section to 
be kept at all times on hand shall be determined by the amount of 
deposits in all respect, as provided for in the said section. 

PROVISIONS FOR REDEEMING CIRCULATION. FIVE PER CENT. RE- 
DEMPTION FUND. 

Sec. 3. That every association organized, or to be organized, 
under the provisions of the said act, and of the several acts amenda- 
tory thereof, shall at all times keep and have on deposit in the 
Treasury of the United States, in lawful money of the United States, 
a sum equal to five per centum of its circulation, to be held and used 
for the redemption of such circulation; which sum shall be counted 
as a part of its lawful reserve, as provided in section two of this act; 
and when the circulating notes of any such association, assorted or 
unassorted, shall be presented for redemption, in sums of one thou- 
sand dollars, or any multiple thereof, to the Treasurer of the United 
States, the same shall be redeemed in lawful money of the United 
States. All notes so redeemed shall be charged by the Treasurer 
of the United States to the respective associations issuing the same, 
and he shall notify them severally, on the first day of each month, 
or oftener, at his discretion, of the amount of such redemptions; and 
whenever such redemptions for any association shall amount to the 
sum of five hundred dollars, such association so notified shall forth- 
with deposit with the Treasurer of the United States a sum in United 
States notes equal to the amount of its circulating-notes so redeemed. 
And all notes of national banks worn, defaced, mutilated, or other- 
wise unfit for circulation shall, when received by any assistant 
treasurer or at any designated depository of the United States, be 
forwarded to the Treasurer of the United States for redemption as 
provided herein. And when such redemptions have been so reim- 
bursed , the circulating-notes so redeemed shall be forwarded to the 
respective associations by which they were issued; but if any of 
such notes are worn, mutilated, defaced, or {rendered otherwise 
unfit for use, they shall be forwarded to the Comptroller of the Cur- 
rency and destroyed and replaced as now provided by law: Provided, 
That each of said associations shall reimburse to the Treasury the 
charges for transportation, and the costs for assorting such notes; 
and the associations hereafter organized shall also severally reim- 
burse to the Treasury the cost of engraving such plates as shall be 
ordered by each association respectively; and the amount assessed 
upon each association shall be in proportion to the circulation re- 
deemed, and be charged to the fund on deposit with the Treasurer: 
And provided further, That so much of section thirty-two of said na- 
tional bank act requiring or permitting the redemption of its circulat- 



220 THE FEDERAL RESERVE ACT. 

ing notes elsewhere than at its own counter, except as provided for 
in this section, is hereby repealed. 

Sec. 5197. 

LIMITATION UPON RATE OF INTEREST WHICH MAY BE TAKEN. 

Any association may take, receive, and charge on any loan or 
discount made, or upon any note, bill of exchange, or other evidences 
of debt, interest at the rate allowed by the laws of the State, Terri- 
tory or District where the bank is located, and no more, except that 
where by the laws of any State a different rate is limited for banks of 
issue organized under State laws, the rate so limited shall be allowed 
for associations organized or existing in any such State under this 
Title. When no rate is fixed by the laws of the State, or Territory, 
or District, the bank may take, receive, reserve, or charge a rate not 
exceeding seven per centum, and such interest may be taken in ad- 
vance, reckoning the days for which the note, bill, or other evidence 
of debt has to run. And the purchase, discount, or sale of a bona 
fide bill of exchange, payable at another place than the place of such 
purchase, discount, or sale, at not more than the current rate of ex- 
change for sight drafts in addition to the interest, shall not be con- 
sidered as taking or receiving a greater rate of interest. 

Sec. 5198. 

CONSEQUENCES OF TAKING UNLAWFUL INTEREST. JURISDICTION OF 
SUITS BY OR AGAINST NATIONAL BANKS. 

The taking, receiving, reserving, or charging a rate of interest 
greater than is allowed by the preceding section, when knowingly 
done, shall be deemed a forfeiture of the entire interest which the 
note, bill, or other evidence of debt carries with it, or which has been 
agreed to be paid thereon. In case the greater rate of interest has 
been paid, the person by whom it has been paid, or his legal repre- 
sentative, may recover back, in an action in the nature of an action 
of debt, twice the amount of the interest thus paid, from the associa- 
tion taking or receiving the same; provided such action is commenced 
within two years from the time the usurious transaction occurred. 
That suits, actions and proceedings against any association under 
this Title may be had in any circuit, district , or territorial court of 
the United States held within the district in which such association 
may be established, or in any State, county, or municipal court in 
the country or city in which said association is located, having juris- 
diction in similar cases. 

Sec. 5200. 

LIMITATION OF LIABILITIES WHICH MAY BE INCURRED BY ANY ONE 
PERSON, COMPANY, ETC. 

The total liabilities to any association, of any person, or of any 
company, corporation or firm for money borrowed, including in the 



THE FEDERAL RESERVE ACT. 22] 

liabilities of a company or firm the liabilities of the several members 
thereof, shall at no time exceed one-tenth part of the amount of the 
capital stock of such associations, actually paid in and unimpaired 
and one-tenth part of its unimpaired surplus fund: Provided, how- 
ever, That the total of such liabilities shall in no event exceed thirty 
per centum of the capital stock of the association. But the discount 
of bills of exchange drawn in good faith against actually existing 
values, and the discount of commercial or business paper actually 
owned by the person negotiating the same shall not be considered 
as money borrowed . 

Sec. 5201. 

ASSOCIATIONS MUST NOT LOAN ON OR PURCHASE THEIR OWN STOCK 

No association shall make any loan or discount on the security 
of the shares of its own capital stock, nor be the purchaser or holder 
of any such shares, unless such security or purchase shall be neces- 
sary to prevent loss upon a debt previously contracted in good faith; 
and stock so purchased or acquired shall, within six months from the 
time of its purchase, be sold or disposed of at public or private sale; 
or, in default thereof, a receiver may be appointed to close up the 
business of the association, according to Section fifty-two hundred 
and thirty-four. 

Sec. 5208. 

PENALTY FOR FALSELY CERTIFYING CHECKS. 

It shall be unlawful for any officer, clerk or agent of any national 
banking association to certify any check drawn upon the association 
unless the person or company drawing the check has on deposit with 
the association, at the time such check is certified, an amount of 
money equal to the amount specified in such check. Any check so 
certified by duly authorized officers shall be a good and valid obliga- 
tion against the association; but the act of any officer, clerk, or 
agent of any association, in violation of this section, shall subject 
such bank to the liability and proceedings on the part of the Comp- 
troller as provided for in section fifty-two hundred and thirty-four. 

PUNISHMENT FOR FALSELY CERTIFYING CHECKS, ETC. 

That any officer, clerk, or agent of any national banking associa- 
tion, who shall willfully violate the provisions of an act entitled "An 
act in reference to certifying checks by national banks," approved 
March third, eighteen hundred and sixty-nine, being section fifty- 
two hundred and eight of the Revised Statutes of the United States, 
or who shall resort to any device, or receive any fictitious obligation, 
direct or collateral, in order to evade the provisions thereof, or who 
shall certify checks before the amount thereof shall have been regu- 
larly entered to the credit of the dealer upon the books of the bank- 
ing association, shall be deemed guilty of a misdemeanor, and shall, 
on conviction thereof in any circuit or district court of the United 



THB FEDERAL RESERVE ACT. 

States, be fined not more than live thousand dollars, or shall be im- 
prisoned OOl matt than five years, or both, in the discretion of the 
eourt. 

Sec. 5209. 

PENALTY FOR EMBEZZLEMENT. 

Every president, director, cashier, teller, clerk, or agent of any 
association, who embezzles, abstracts, or willfully misapplies any of 
the moneys, funds, or credits of the association; or who, without 
authority from the directors, issues or puts in circulation any of the 
notes of the association; or who, without such authority, issues or 
puts forth any certificate of deposit, draws any order or bill of ex- 
change, makes any acceptance, assigns any note, bond, draft, 
bill of exchange, mortgage, judgment, or decree, or who makes any 
false entry in any book, report, or statement of the association, with 
intent, in either case, to injure or defraud the association or any other 
company, body politic or corporate, or any individual person, or to 
deceive any officer of the association, or any agent appointed to 
examine the affairs of any such association; and every person who 
with like intent aids or abets any officer, clerk, or agent in any viola- 
tion of this section, shall be deemed guilty of a misdemeanor, and 
shall be imprisoned not less than five years nor more than ten. 

NATIONAL BANKS NOT PERMITTED TO MAKE CONTRIBUTIONS IN CON- 
NECTION WITH ELECTION TO POLITICAL OFFICE. 

That it shall be unlawful for any national bank, or any corpora- 
tion organized by authority of any laws of Congress, to make a 
money contribution in connection with any election to any political 
office. It shall also be unlawful for any corporation whatever to 
make a money contribution in connection with any election at which 
Presidential and Vice-Presidential electors or a Representative in 
Congress is to be voted for, or any election by any State legislature 
of a United States Senator. Every corporation which shall make 
any contribution in violation of the foregoing provisions shall be sub- 
ject to a fine not exceeding five thousand dollars, and every officer 
or director of any corporation who shall consent to any contribution 
by the corporation in violation of the foregoing provisions shall upon 
conviction be punished by a fine of not exceeding one thousand and 
not less than two hundred and fifty dollars, or by imprisonment for 
a term of not more than one year, or both such fine and imprison- 
ment in the discretion of the court. 

Sec. 5211. 

REPORTS TO COMPTROLLER OF THE CURRENCY. 

Every association shall make to the Comptroller of the Currency 
not less than five reports during each year, according to the form 
which may be prescribed by him, verified by the oath or affirmation 



THE FEDERAL RESERVE ACT. 223 

of the president or cashier of such association, and attested by the 
signature of at least three of the directors. Each such report shall 
exhibit, in detail and under appropriate heads, the resources and 
liabilities of the association at the close of business on any past day 
by him specified; and shall be transmitted to the Comptroller within 
five days after the receipt of a request or requisition therefor from 
him, and in the same form in which it is made to the Comptroller 
shall be published in a newspaper published in the place where such 
association is established, or if there is no newspaper in the place, 
then in the one published nearest thereto in the same county at the 
expense of the association; and such proof of publication shall be 
furnished as may be required by the Comptroller. The Comptroller 
shall also have power to call for special reports from any particular 
association whenever in his judgment the same are necessary in 
order to a full and complete knowledge of its condition. 

VERIFICATION OF REPORTS. 

The oath or affirmation required by section fifty-two hundred 
and eleven of the Revised Statutes, verifying the returns made by 
national banks to the Comptroller of the Currency, when taken be- 
fore a notary public properly authorized and commissioned by the 
State in which such notary resides and the bank is located, or any 
other officer having an official seal, authorized in such State to ad- 
minister oaths, shall be a sufficient verification as contemplated by 
said section fifty-two hundred and eleven: Provided, That the 
officer administering the oath is not an officer of the bank. 

Sec. 5212. 

REPORT AS TO DIVIDENDS. 

In addition to the reports required by the preceding section, each 
association shall report to the Comptroller of the Currency, within 
ten days after declaring any dividend, the amount of such dividend, 
and the amount of net earnings in excess of such dividend. Such 
reports shall be attested by the oath of the president or cashier of the 
association. 

Sec. 5213. 

PENALTY FOR FAILURE TO MAKE REPORTS. 

Every association which fails to make and transmit any report 
required under either of the two preceding sections shall be subject 
to a penalty of one hundred dollars for each day after the periods, 
respectively, therein mentioned, that it delays to make and transmit 
its report. Whenever any association delays or refuses to pay the 
penalty herein imposed after it has been assessed by the Comptroller 
of the Currency, the amount thereof may be retained by the Treasurer 
of the United States, upon the order of the Comptroller of the Cur- 
rency, out of the interest, as it may become due to the association, 
on the bonds deposited with him to secure circulation. All sums of 
money collected for penalties under this section shall be paid into 
the Treasury of the United States. 






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